|By Burton G. Malkiel, The Wall Street Journal, 12/31/2014|
MarketMinder's View: This piece is chock full of fallacies and internal contradictions. If you are merely rebalancing, not making an active strategy change, how can you defend doing so based on valuations (like the fatally flawed CAPE)? That’s an active decision based on the (probably mistaken) belief the market is overvalued. As is the random allocation of 25% to foreign stocks based, also, on valuations. So when this article later pumps passive investing, we were frankly left scratching our heads. Picking one stock versus another, we are told, is problematic active investing. But investors are a-ok if they are picking entire countries, regions, sectors, categories of bonds and asset allocations, then rebalancing them based on valuations, as long as they use index-tracking products? What exactly would you call that? (We have a suggestion, and it starts with “active.”)
|By Noah Smith, Bloomberg, 12/31/2014|
MarketMinder's View: The beginning of this article is a standard recap of the active versus passive debate. The real value here, in our view, is in the back half when this article makes the very sensible and much less commonplace point that the line between passive and active is a heckuva lot blurrier than many suggest. For more, see Todd Bliman’s 08/12/2014 column, “Passive Investing’s Primary Error: It’s (Mostly) Imaginary.”
|By Morgan Housel, The Wall Street Journal, 12/31/2014|
MarketMinder's View: This perhaps gives too much credence to recent Fed policy as supporting the bull market, which there isn’t really much evidence to support beyond coincidence. We’d suggest that quantitative easing, for example, has more dampened economic growth than anything else, since it flattened the yield curve, reducing banks’ incentive to lend. But overall, this is a very sensible look at the history behind rate hikes. As we have written here many times, there is just no history suggesting an initial Fed hike is so bad for stocks. There is history Fed errors are, but it is a wee bit hard to see how raising interest rates modestly against a backdrop of more than five years of economic growth—with four of the last five quarters above the US economy’s long-term average—would be an error.
|By Giovanny Moreano, CNBC, 12/31/2014|
MarketMinder's View: The “Dogs of the Dow” is a longstanding, heavily marketed tactic that suggests you invest equal sums in the 10 Dow Jones Industrial Average components with the highest dividend yield at the end of the year. So, with 2014 coming to a close today, the roster will be set. However, please take note: This tactic is a) widely known b) all hinges on past performance and c) mistakenly targets dividend yield. Nothing about this amounts to good strategy. Past performance (which largely generates those lofty relative dividend yields) is just not predictive, no matter how you slice it. This also hinges on mean reversion: The theory being that stocks with higher yields this year will see a price rebound driving the yield back down to the Dow’s average. But averages are only the result of many extremes on both sides. They aren’t predictive, either.
|By Mehreen Khan, The Telegraph, 12/31/2014|
MarketMinder's View: Here is an ultra-pessimistic take that labels 3.3% GDP growth a “crisis” and suggests next year may look no better. Its evidence is to focus near exclusively on Russia, Japan and the eurozone, using these relative weak spots to color the depiction of the world economy. It omits the accelerating US, still robust UK, fast-growing China, other Asian Emerging Markets and more. It also relies on headline statistics like low inflation readings, presuming the trend will continue into deflation, and that modest, energy-driven deflation would even be bad (if it came to pass). To this, it adds skewed statistics regarding income distribution that are pre-tax and pre-benefit programs, unadjusted for the changing nature of the US household, and don’t actually account for the fact the bottom 90% and top 10% of US households by income change over time. We could go on. Suffice it to say that if we are “doomed” to another year of 3.3% global GDP growth and overall rising global stock markets, we’d be dandy with it.
|By Troy Bramston, The Australian, 12/31/2014|
MarketMinder's View: Yes, Australia is currently running a budget deficit of roughly A$40 billion. But we don’t really think the country needs to shift its trade strategy to become the world’s nuclear waste repository to cover a deficit that amounts to 2.5% of GDP, particularly in a nation where net debt amounts to only about 14% of GDP. This is a false fear, with a bizarre remedy. But an interesting read!
|By Tom DiChristopher, CNBC, 12/31/2014|
MarketMinder's View: This is too Pollyanna. That’s not to say you should worry about the economy in 2017 or 2016, just that this forecast is too far into the future to be useful. What’s more, the notion that rising oil prices triggered 2008—or that they’ve triggered many US recessions—is faulty. Yes, oil rose sharply in 2008. No, that didn’t trigger unnecessary mark-to-market losses of about $2 trillion on banks’ balance sheets. It also didn’t necessitate the government haphazardly dealing with the fallout from said unnecessary mark-to-market losses. Those are the things that caused the 2008 Global Financial Crisis—which, as the name implies, was centered in financials. It was not the 2008 Oil Price Crisis.
|By Marc Jones, Reuters, 12/31/2014|
MarketMinder's View: Aaaaaaaaaaaaaaaaannnnnnd investors should yawn. Look, there is just no history of ratings agency actions being a prelude to problems. They are more often a statement of the abundantly obvious or the misguided. Take, for example, Russia’s woes: These have basically been front-page news since February in some way, shape or form. Compared to falling oil revenues, what S&P, Moody’s or Fitch thinks of his nation is probably not very concerning to Russian “President” Vladimir Putin.
|By James G. Neuger, Bloomberg, 12/30/2014|
MarketMinder's View: The conclusion reached here—that Greece's ongoing political theatrics don't really imperil the euro and have a very limited impact—is sensible enough. And yes, the formalization of the European Stability Mechanism is a plus. However, Greece's impact in 2010 wasn’t fundamental whatsoever, and was more about its ability then to stoke fear and roil sentiment, which can happen for any or no reason. Consider: Where was the titular “Spillover” then? The global bull market continued in 2010, 2011 and 2012 despite widespread fear of a Greece-induced eurozone crisis. The global economy grew. The major difference now is this is the end of the fourth straight year of Greece fears and woes, which have proven false to date. The fear has lost the power to move markets much at all.
|By John Steele Gordon, The Wall Street Journal, 12/30/2014|
MarketMinder's View: OK party people: What time is it? Time to set partisanship aside to read a very interesting article that actually does make 10 salient points about abolishing the corporate income tax that are at least worth thinking over. And when you’re done, you can immediately stop thinking about them, because the likelihood abolishing the corporate income tax comes to pass in the US is, rounded to the nearest whole number, zero.
|By Weiyi Lim, Bloomberg, 12/30/2014|
MarketMinder's View: So this shouldn’t really be a shock to anyone. The term one American economist coined that mashes together four major Emerging Markets economies—“BRICs” (Brazil, Russia, India and China)—is more marketing than economic analysis, a point driven home by recently diverging fortunes. Which seems obvious because they are, you know, different countries. China and India are fast-growing consumers of raw materials and Energy. Russia and Brazil are primarily producers of raw materials and Energy. That’s an oversimplification, but it should help illustrate why their markets and economies aren’t performing the same in a period when Energy and Materials are suffering with massive oversupply. Categorizing can be helpful, as Emerging Markets typically share some characteristics, like developing protections for property rights.
|By Brian Blackstone, The Wall Street Journal, 12/30/2014|
MarketMinder's View: Forget the claptrap herein regarding M3 growth not being on a par to generate “target” 2% inflation. There is no evidence 2% inflation is some magic number that corresponds to fast growth and booming stocks. Heck, look at the US, which is leading the developed world with GDP growth exceeding its postwar average in four of the last five quarters. The last quarter’s GDP growth was the fastest in more than a decade. But at no point in those five quarters has inflation met the target. We’d suggest that this news of a growing money supply and increased lending is a sign that the deflationary doom so many fret isn’t likely to happen. And it is yet another sign prevalent negative sentiment toward the eurozone is overdone.
|By Jeff Cox, CNBC, 12/30/2014|
MarketMinder's View: The theory here is recent inflows in stock mutual funds and exchange-traded funds (ETFs) are high, and this is a contrarian sign of trouble to come because we all know that Mom and Pop investors are just way late to the party. Now, there is some truth to the fact that, unfortunately, many individual investors miss significant chunks of bull market and buy late. But to assume any inflow is a bear market signal is just way oversimplified. You can get inflows in a bull market—that was the story for the majority of the 1990s bull. Others pressing the buy button is not necessarily a signal for you to hit sell. Also, inflows into mutual funds may be higher these days than they’ve been in recent years, but this doesn’t seem so alarming when you consider they’ve only been positive in two of this bull market’s nearly six years. (PS: The ETF data is also not all that useful here, because the data set is really short for an investment vehicle that has grown massively over the years. It also isn’t purely a retail investor tool, unlike mutual funds, which pretty much are.)
|By Anthony Mirhaydari, Yahoo! Finance, 12/30/2014|
MarketMinder's View: So the theory here is there won’t be enough stock buyers to support currently “lofty” valuations when, at some undermined point in the far-flung future, a generation of millions of baby boomers spanning 18 years somehow inexplicably decides en masse to press the sell button. Folks, we have all known that the baby boomers were aging because that is what people do: age. Markets are efficient discounters of widely known information, like the fact people age. Markets are also an auction, so you don’t need masses of buyers and new money to bid stocks up. Finally, all this is just rampant pessimism about millennials based on incorrectly couched statistics (student loan debt, if you use the median figure, is less than the size of a modest car loan; median “household” income figures that don’t account for the changing US household are pretty subpar, etc.). Anyways, buying into this theory is a recipe for missing long-term returns because the particulars of it won’t change for generations. (Oh and the cyclically adjusted price-to-earnings ratio is faulty.)
|By James Titcomb, The Telegraph, 12/29/2014|
MarketMinder's View: Sends Greek markets into a turmoil, that is—most indexes globally barely blinked. Seems to us markets largely realize Greece’s problems are Greece’s, and whether the anti-austerity Syriza party wins the upcoming snap election (not a guaranteed outcome by any stretch) doesn’t really matter for the eurozone or the world. One, Syriza isn’t anti-euro. Two, Greece has largely finished its existing bailout programs and has made its initial return to capital markets. Leaders have discussed establishing a provisionary line of credit to help ease the transition as the bailouts end in February, and a Syriza government might have a harder time negotiating with the troika, but that is worlds away from bailing on the euro. We suspect the eurozone can handle this, just as it handled Greece’s two bailouts and two defaults in 2011 and 2012. As can the world, which has long since realized Greece’s political theater isn’t a swing factor globally. For more, see our 12/10/2014 commentary, “The Greek Gambit, Redux.”
|By Glenn Kessler, The Washington Post, 12/29/2014|
MarketMinder's View: The facts here are always worth keeping in mind and speak for themselves: China, despite widespread belief otherwise, owns less than 10% of net US debt (debt owned by the public, not the Treasury). More interesting, though, is the study that prompted this piece in the first place. Over half of the Americans interviewed believe China owns at least half of America’s outstanding debt! And as a corollary, they believe that somehow gives China undue influence and power over America’s fate. Never mind that US Treasurys don’t have a call feature—bond owners can’t just decide to collect—and America has no trouble repaying bond principal and interest. Also interesting? Anecdotally, folks’ viewpoints and fears largely echoed the political rhetoric spouted by bigwigs in both parties. Politicians have a bigger incentive to get us riled up than to portray facts. But that’s just sociology. For investors, the lesson is to find and weigh the facts, not get caught up in mass sentiment.
|By Larry Elliott, The Telegraph, 12/29/2014|
MarketMinder's View: The thesis here? The end of 2014 looks like the end of 1999—just before the dot-com implosion kicked off a nasty bear market—except this time could be worse because the underlying problems never went away (huh?) and growth is slower this time around. Um, last we checked, the trouble in 2000 was a runaway stock supply increase that euphoric investors missed. They also missed some pretty big negatives signaling a recession was likely, including an inverted yield curve and steadily falling US Leading Economic Index. None of those factors is present today, and sentiment is far tamer. As for the this-time-it’s-worse stuff, one, the global economy is actually not drowning in a “toxic brew” of “debt, deflation, and massive speculative inflows from a largely unreformed banking system.” Global debt levels are benign, deflation is nonexistent, and those speculative inflows are a myth. Nor is the global economic system “irreparaply broken.” Two, low interest rates aren’t keeping growth going—actually, we think the evidence suggests they’re a headwind, as higher long-term rates would steepen the yield curve, which over a century of evidence proves is a nice shot in the arm.
|By Jason Zweig, The Wall Street Journal, 12/29/2014|
MarketMinder's View: Here is some more perspective on a mutual fund inefficiency we discussed last week—namely, the fact funds are legally required to distribute all net capital gains realized during the year to investors, creating a taxable event in non-qualified accounts. Regardless of whether the investors themselves sold any shares. In other words, you pay taxes for gains you yourself didn’t necessarily incur. Many funds are reporting high capital gains distributions for 2014, as they’ve largely used up crisis-era losses (which they used to offset gains earlier in this bull market). Mutual funds have their benefits, particularly for small investors who can’t diversify cost-effectively with individual stocks. But larger investors have more flexibility—something to keep in mind if you’re weighing whether your fund strategy is right for you. For more, see our 12/26/2014 commentary, “A Companion to Your 2015 Investment Product Catalogue.”
|By Spencer Jakab, The Wall Street Journal, 12/29/2014|
MarketMinder's View: This piece makes some interesting observations about jobless claims—they indeed have sometimes peaked as bear markets ended and bottomed at bull market peaks. Which would make them seem like a dynamite contrarian indicator! But there are a couple problems. One, which the article notes: “A peak or trough on a chart is only evident in hindsight.” You can’t know, real-time, if jobless claims are at a peak or trough—there is no magic number, high or low. Two, which the article ignores: Interesting observations are not synonymous with causal correlations. There is no inherent, causal relationship between jobless claims and the economy or stock market movement. Jobless claims are one of the Leading Economic Index’s 10 variables, but they are also one of the noisiest components. So, suffice it to say we would suggest long-term investors not follow the advice in this article’s last two sentences. Low jobless claims aren’t reason to turn bearish or expect stocks to peak in 2015.
|By Staff, The Yomiuri Shimbun, 12/29/2014|
MarketMinder's View: More specifics on Japanese Prime Minister Shinzo Abe’s plan to get the country’s 34.62% corporate tax rate down into “the twenties” within the next few years. Bully! Though, we’d point out they’re still in the planning and proposing stage here. Parliament still hasn’t passed anything. Now, perhaps that’s a mere formality considering Abe’s coalition has a supermajority, but this government has a history of talking more than it acts, so some skepticism might be in order. Plus, cutting corporate taxes some isn’t a panacea for Japan’s many structural issues—particularly since, as suggested here, officials aim to replace “lost” revenue with a bunch of new tax provisions, likely making the tax code more complicated overall. That can easily offset the benefits of a lower headline rate.
|By Editorial Board, The New York Times, 12/29/2014|
MarketMinder's View: This operates on the false presumption that the Fed’s mandate stretches beyond balancing inflation and unemployment and includes preventing asset bubbles. Last we checked, that wasn’t in the charter. Nor do the incrementally watered-down regulations listed here have much to do with “speculation” and potential stock market bubbles. Like, giving banks extra time to get their living wills in order doesn’t give them the green light to load up their balance sheets with highly leveraged filth. It just, you know, gives them an extra year to write a how-to guide for the Fed and Treasury to use if the bank fails. Bizarrely, the reason they need more time is because the Fed is waffling on whether banks should expect it to fulfill its other primary role—the purpose it was created for—serving as lender of last resort. The rest here isn’t any closer to reality. Giving banks two extra years to sell stakes in private equity and hedge funds has pretty much nothing to do with stocks. Oh, and stocks’ continued bull market doesn’t depend on near-zero interest rates. Nor does the US economic expansion. Fundamentals globally are far brighter than this piece indicates.
|By Michelle Singletary, The Washington Post, 12/26/2014|
MarketMinder's View: A fine idea, and as this points out, taking stock (pun intended) of your finances and investment strategy can help keep you from repeating past investment mistakes, like having a portfolio that doesn’t match your long-term goals and daily needs. But the approach outlined in this article’s second half likely won’t help much in that regard. Your total net worth is a helpful thing to know, but knowing it doesn’t really help you be a better investor or make wiser decisions. Nor does it help you know how much of a buffer you have if times get tough, because you can’t really spend illiquid assets like your house or car. In our view, a more helpful approach would be to calculate your total liquid net worth and how those funds are allocated—how much do you have in stocks, bonds, cash or other securities? Then assess how those mesh with your long-term goals. For more on what to do next, see our snazzy guide here.
|By Anna B. Wroblewska, CNNMoney, 12/26/2014|
MarketMinder's View: So on one hand, this is a handy look at two age-old behavioral errors: myopic loss aversion and regret shunning. Loss aversion is what makes folks hold on to poorly performing stocks long after the thesis to own them was disproved—thinking if they just hold on long enough, that red will turn to green! That bias blinds folks to the fact they’d likely be better off admitting they were wrong, selling, and looking for better opportunities and more forward-looking potential elsewhere. Regret shunning is what makes folks blame everyone else possible for decisions that don’t work out—like fund managers for picking “bad stocks,” CEOs for setting “bad expectations,” analysts for making “bad recommendations” and many more. That bias prevents investors from learning from their mistakes. Which brings us to the second half of this article: Deliberately shunning regret isn’t the way to battle loss aversion. That’s just swapping one error for another! Instead, use bad picks as a learning opportunity. Embrace your mistakes, figure out what went wrong, and then apply those lessons moving forward to reduce your overall error rate. That’s how you get better and become a disciplined investor.
|By Tara Siegel Bernard, The New York Times, 12/26/2014|
MarketMinder's View: So here is some news you can maybe use about some new things that might show up on your mountains of IRS paperwork next year. Sure, it’s only Boxing Day, but it is never too early to start reading up and figuring out what you should discuss with your CPA! Especially since those IRS helplines will probably be pretty clogged this year.
|By Staff, Reuters, 12/26/2014|
MarketMinder's View: That’s an odd way of saying holiday retail sales look poised to grow a decent amount from 2013. A 3-4% rise, if it comes to pass, is nothing to sneeze at—it’s consistent with broader economic growth. Even if they turn out weaker, holiday shopping is a sliver of US economic activity. Nothing here signals bad times ahead for America’s economy.
|By Szu Ping Chan, The Telegraph, 12/26/2014|
MarketMinder's View: No, this isn’t a Russian retelling of How the Grinch Stole Christmas, though we’d pardon you for assuming that. It is actually your daily dose of Russia’s economic woes. In today’s edition, Russia’s finance minister warned of a 4% GDP contraction for next year and outlined plans to tap government reserve funds to fill the state budget’s expected shortfall. Russia has more than enough reserves to handle this for the time being, and there is no way to know whether oil prices will be this low (and Russia still largely cut off from international capital markets) over the next few years—so you can tune out the many pieces extrapolating years of pain for the Motherland.
|By Joshua M. Brown, The Reformed Broker, 12/26/2014|
MarketMinder's View: The takeaway here is a fine reminder: Past seasonal trends aren’t predictive. But the entire subject sort of misses the point. If you’re investing for long-term growth, what does it really matter if next month is smashing, ho-hum or down? Trying to invest around short-term swings is a fool’s errand. If you’re in it for the long haul, and you expect more bull market, it probably makes sense to be in stocks regardless of how January might go.
|By Spencer Jakab, The Wall Street Journal, 12/26/2014|
MarketMinder's View: We have said it before, and we will say it again: The cyclically adjusted price-to-earnings (CAPE) ratio is bogus. Comparing current prices to 10 years of inflation-adjusted earnings tells you nothing. The last decade’s earnings and market movement don’t predict the future. CAPE doesn’t even tell you about sentiment, since it is so skewed by the last crisis, which depressed earnings bigtime. When you buy a stock today, you aren’t paying a premium for past earnings—you’re buying the future. That makes the normal forward P/E, bizarrely derided as “misleading” here, a much better sentiment indicator. Yes, it’s based on analysts’ expectations, but those expectations are often based on forward-looking items and today’s circumstances, which are much more useful to investors than what happened a decade ago.
|By Scott Grannis, Calafia Beach Pundit, 12/26/2014|
MarketMinder's View: Here are some fun factoids to put all those fears about a high-yield Energy junk bond crisis into perspective. The kicker? “The likely defaults on US high-yield energy debt ($30 billion) are essentially a drop (0.1%) in a very large bond market bucket ($28.3 trillion). $30 billion is a very small number compared to the total value $51.7 trillion of US bonds and equities. Losses of this magnitude happen frequently and often many times each day.” For more, see our 12/12/2014 commentary, “Debunking the Junk Funk.”
|By Mario Dakers, The Telegraph, 12/26/2014|
MarketMinder's View: Actually, here’s how we would sum up this year in currency markets: Some currencies rose and others fell, creating winners and losers. That’s it. Take the UK. Stronger sterling might indeed weigh on exporters’ profits, but few British firms manufacture goods using only domestically sourced raw materials and components. So the stronger pound also helped knock down costs on imported inputs, offsetting at least some of the currency’s impact on export revenues. A stronger (or weaker) currency isn’t inherently good or bad. There are tradeoffs, always.
|By Lingling Wei, The Wall Street Journal, 12/26/2014|
MarketMinder's View: More targeted monetary stimulus in China, where officials continue doing what they believe necessary to keep growth near the target range. This piece highlights the ins and outs and why of this particular move, which involves changes in how the loan-to-deposit ratio is calculated, allowing banks to free up more deposits for lending—a quick liquidity boost without cutting rates across the board.
|By Jeffrey Sparshott, The Wall Street Journal, 12/26/2014|
MarketMinder's View: Yes, job opportunities in the Oil & Gas industry are probably on the wane as companies seek to control costs wherever possible as prices fall. But, that hardly means job prospects are dimming across the entire US economy. The employment growth rate in oil-related industries might be higher than the broader economy, but a little math based on the figures cited in this article tells us that segment added about 486,000 jobs since 2010 began (through October). That’s a lot of jobs! But it’s also way lower than the nearly 10.6 million jobs added by the entire US private sector over that same period. Scale matters, folks.
|By Editorial Staff, The New York Sun , 12/24/2014|
MarketMinder's View: So the thesis here is that Dow 18,000 isn’t meaningful because we aren’t at a record high when the index is priced in gold. Now, forget the gold-standard talk—an issue for another day. Trouble here is (and we went to the underlying source and deconstructed the charts) the math underlying this is totally incorrect, because it presumes the Dow at 18,000 is $18,000, divides by the gold price per ounce and then multiplies it by 28.3495, the number of grams in an ounce. You can’t do that for multiple reasons. The Dow level isn’t in dollars, it is points. Points calculated using price-weighting of 30 randomly selected stocks, then adjusted using a mathematical scheme that attempts (but fails) to account for stock splits. Also, gold’s price isn’t fixed like it was when the US was on gold standard, so you have many moving parts. Finally, it’s irrelevant either way. Index levels, especially something so randomly determined as the Dow’s narrow, wonky level, don’t tell you anything about where stocks will go. And that’s priced in points, dollars, gold, silver, pork bellies or fool’s gold.
|By Liam Denning, The Wall Street Journal, 12/24/2014|
MarketMinder's View: Actually, gold has been falling since 2011, so all this rambling about 2014 being such an odd year is out of context. Here is the context: Since 2011, the following events have occurred: The Fed launched Operation Twist, Quantitative Easing (QE) 3 and QE-infinity. It later “tapered,” eventually ending QE. We’ve had rising and falling long-term interest rates. The BoJ launched a massive QE program and Japan grew like gangbusters and had a recession. The eurozone was in and out of recession. Geopolitical tensions rose in North Africa, the Middle East, Syria, Israel, Ukraine/Russia, Iraq and more. All the while, gold fell. So maybe 2014 was actually just more evidence gold is not a hedge or insurance against monetary policy, inflation, deflation, recession, geopolitical tensions or any other factor? Just maybe? But also, note: Gold’s 2014 performance doesn’t say anything about 2015. Commodities trade on markets and markets are not serially correlated. We believe investing in gold is a dodgy idea, largely because it’s more volatile than stocks with lower longer-term returns. That’s a bad combo, unless a) you can prove it effectively hedges against something, which it doesn’t (see above) or b) you have an uncanny ability to time something that’s down much more often than up. Maybe the right question about investing in gold isn’t where is it headed and why didn’t it react to events. It is, “Do you feel lucky?”
|By Ksenia Galouchko and Vladimir Kuznetsov, Bloomberg, 12/24/2014|
MarketMinder's View: Credit-ratings service Standard and Poor’s (S&P) is warning they may downgrade Russia’s credit rating into junk territory in the next 90 days due to the following: The ruble turning to rubble, the weak Energy-based economy, government pressure on Russian firms to sell foreign currency and super-high borrowing costs. However, we’d suggest everyone in the market was pretty darn aware those four factors already. This is breaking news from a month ago, couched as a drastic rating change—in keeping with standard credit-rating agency practices, which are often poor on the timeliness scale. An S&P downgrade seems like the least of Russia’s concerns.
|By Stan Haithcock, MarketWatch, 12/24/2014|
MarketMinder's View: The five? Raising the bar to qualify to sell indexed annuities; simplifying products; having regulators tighten controls over advertising; higher 10-year Treasury rates (since this governs many aspects of annuity interest and payments); and wishing for customers to seek annuities out, not salespeople peddling them. We don’t agree with all of this—we think those customers not seeking out annuities are just making a rational choice when it comes to a complicated and often misleadingly sold product. But there is a lot of sense in this article, which we wish many potential annuity buyers would read. For more, visit Fisher Investments’ educational website, Annuity Assist.
|By Staff, Reuters , 12/24/2014|
MarketMinder's View: Ok, so no real market impact from this. But now Russia’s crisis is really hitting home, with Russian “President” Vladimir Putin ordering price caps on the cultural staple at the holidays. However, it seems Vladimir’s economics are failing him once again: Slapping price caps on expensive vodka doesn’t dissuade bootlegging, it encourages it: It sends a signal to producers to slash production, which leaves the shelves bare. This very lesson is being taught in Venezuela already, and was taught previously in Soviet Russia. Capping prices, folks, doesn’t work.
|By Shobhana Chondra and Michelle Jamrisko, Bloomberg, 12/24/2014|
MarketMinder's View: Wait. Who is this consumer? Did he or she go somewhere? And they are now back, because November US personal consumption expenditures (PCE) grew 0.56228% m/m? Where were they in the 12 faster months since growth returned in June 2009? Also, lower gasoline prices create winners that get a bigger slice of overall PCE and losers that get less PCE. They do not, contrary to the argument here, bring a massive amount more PCE overall.
|By Justin Lahart, The Wall Street Journal, 12/24/2014|
MarketMinder's View: There is little sign that an economy that has grown above its post-war average in four of the last five quarters can’t handle a rate hike. And a lot of this is forecast and speculation, which concludes with the notion that fast growth and low inflation are problems for the Fed. Ummm. We’d suggest the Fed just tripped over what was once known as “The Goldilocks Economy.” And it isn’t like the Fed was great at forecasting before this latest episode. The Fed usually reacts, and usually pretty late, to rising inflationary pressures.
|By Szu Ping Chan and Denise Roland , The Telegraph, 12/23/2014|
MarketMinder's View: There really isn’t any such thing as an “unsustainable” current account. Economies aren’t fixed pies, and countries with current account deficits have foreign investment surpluses, which help drive growth. This stuff is all largely zero sum. If it weren’t, the US wouldn’t have the world’s most dynamic economy. As for the other part of this article—the UK’s GDP revision—the downward revision to five quarters’ worth of GDP is way too backward-looking to mean anything today. Stocks look forward and don’t really care how the UK did from Q2 2013 through Q2 2014. They care about the future, and nothing in this report tells you what’s in store. Like, that “growing chasm between household spending and business investment” isn’t even a growing chasm. It is a blip after four quarters where business investment growth blew household spending growth away. We aren’t saying the UK is in perfect shape, but perspective is important. Besides, forward-looking indicators like the yield curve and private sector new orders signal more growth ahead.
|By Ye Xie, Bloomberg, 12/23/2014|
MarketMinder's View: Well that’s nice. We’re pretty sure this isn’t a competition though. Nor does it challenge the US’s global economic dominance, whatever that even means. If China wants to bankroll a bunch of client states with dictatorships and mismanaged economies, bully for them. That doesn’t cut into growth or trade in the US and western world. And if it helps China and these other countries grow and trade more, that only benefits everyone else.
|By Stephen S. Roach, MarketWatch, 12/23/2014|
MarketMinder's View: Well, we would be the first to argue that hiking interest rates now isn’t the worst idea, considering the US economy has grown at above its post-war average clip in four of the last five quarters, unemployment is at its long-term average, and forward-looking indicators are expansionary. There is also little historical evidence suggesting this would roil markets. However, this isn’t remotely close to the same as the theory here, which holds that the Fed is keeping rates too low and all its crisis-borne measures in place for too long, spurring an asset bubble like it allegedly did in the last cycle. There is a lot wrong with that, in our view. 1) Bubbles are psychological phenomena, not monetary. 2) The last cycle ended prematurely because a regulatory shift (FAS 157) unnecessarily laid waste to bank balance sheets and the Fed outsourced crisis management to a haphazard Treasury. 3) Quantitative easing may have greatly increased the reserve credits banks hold, but they would have to all suddenly lend off them freely for that to matter much. Hasn’t happened. The Fed needn’t take drastic action at this point to wind down its emergency measures, which were largely ineffective in the first place. Finally, this whole notion of the Fed managing the economy is fundamentally wrong. No one manages a capitalist economy, which is for the best as it allows free choice and individual decision making to cause ideas to collide creatively. The Fed is tasked with acting as the lender of last resort and balancing inflation and employment. The Fed’s record of reaching even these more modest goals is spotty, so why should we give them a promotion to Economic Manager?
|By Sarah N. Lynch, Reuters, 12/23/2014|
MarketMinder's View: “In an annual report on market activities, the Securities and Exchange Commission's Office of the Investor Advocate said private placements, variable annuities, non-traded real estate investment trusts (REITS) and binary options all presented problems for investors.” Seems like a good list of products to start with, if you asked us. Here are two major examples why we agree: Variable annuities are high fee, low returning, little protection insurance products with little liquidity. Nontraded REITs are high fee, illiquid and very similar to more liquid, lower fee traded REITs. We struggle to see why these are a thing. In addition, very recently it came to light there were accounting irregularities at a firm that backs about 50% of outstanding Nontraded REITs.
|By Ambrose Evans-Pritchard, The Telegraph, 12/23/2014|
MarketMinder's View: By “joins Asia’s currency wars,” this piece means, China talked a lot about how the yuan, which is sort of pegged to the US dollar, has risen way too fast and is like way bad for Chinese exporters—and a 2% fall in the yuan’s value relative to the dollar accompanied all the yammering. So, a lot of speculation here, but Chinese authorities still partially control the exchange rate, so it’s easy to connect the dots. But the “currency war” aspect here is rather overstated. We’re fairly sure exactly no one is surprised China might have intervened after the yen and other neighboring currencies fell—it’s China. That’s what they do. Nor are all those other weaker currencies (save for the yen) deliberate. They’re byproducts of the rising dollar—nothing moves in a vacuum. Also? You can’t really win or lose a currency war, so the term is a misnomer. The exchange rate fluctuations just create winners and losers within each country. That’s it. For more, see Todd Bliman’s book review of the aptly titled Currency Wars.
|By Joseph Ciolli, Bloomberg, 12/23/2014|
MarketMinder's View: Look, there are a lot of reasons not to pay much attention to this, like it’s the Dow, a fatally flawed, price-weighted index of 30 randomly selected stocks, and the GDP report here is the third revision of Q3 2014 growth, data that’s now nearly three months old. Stocks look forward, not back. But also, here is another fallacy: “It’s been 172 days since the Dow closed above 17,000 on July 3, data compiled by Bloomberg show. That’s the fifth-fastest trip between thousands, with the record being 35 days to 11,000 in May 1999. It took the index almost 5,200 days to go from 1,000 to 2,000 between 1972 and 1987, according to [a guy at a financey place].” Well, duh. The move from 17k to 18k is a 5.9% gain. The move from 1k to 2k is 100%.
|By Ambrose Evans-Pritchard, The Telegraph, 12/23/2014|
MarketMinder's View: By “joins Asia’s currency wars,” this piece means, China talked a lot about how the yuan, which is sort of pegged to the US dollar, has risen way too fast and is like way bad for Chinese exporters—and a 2% fall in the yuan’s value relative to the dollar accompanied all the yammering. So, a lot of speculation here, but Chinese authorities still partially control the exchange rate, so it’s easy to connect the dots. But the “currency war” aspect here is rather overstated. We’re fairly sure exactly no one is surprised China might have intervened after the yen and other neighboring currencies fell—it’s China. That’s what they do. Nor are all those other weaker currencies (save for the yen) deliberate. They’re byproducts of the rising dollar—nothing moves in a vacuum. Also? You can’t really win or lose a currency war, so the term is a misnomer. The exchange rate fluctuations just create winners and losers within each country. That’s it. For more, see Todd Bliman’s book review of the aptly titled Currency Wars.
|By Staff, Jiji Press, 12/23/2014|
MarketMinder's View: JP stands for Japan Post, the state-owned postal/banking/insurance behemoth with a ginormous stranglehold on public finances and financial services. Privatization legislation was one of former Prime Minister Junichiro Koizumi’s key achievements before he gave way to Shinzo Abe in 2006, but successive governments between then and now delayed and chipped away at the plans. Now, with Abe back as PM, it seems plans are moving forward, as the government will list shares of the holding company, bank and insurance units next year. These are just the first of many sales, and it will take time (and determination by this and future governments) to reduce the state’s stake below 50% as planned. But it is an encouraging step, and privatization will ultimately benefit Japan’s economy, improving competition and injecting more market forces into financial services. Though, temper your enthusiasm, as this isn’t exactly a litmus test for Abe’s reform prowess. For more on that, see our latest Abe special, “Now What?”
|By Staff, Reuters, 12/23/2014|
MarketMinder's View: So it seems the super tax on salaries exceeding €1 million is going to die a quiet death after not accomplishing very much except raising the ire of a select few high-earning French people. All in all, it raised a paltry $420 million in two years, which is zippo in an economy the size of France’s. Here is largely why: “’A few [high earners] went abroad -- to Luxembourg, the UK,’ said tax lawyer Jean-Philippe Delsol, author on a book on tax exiles called ‘Why I Am Going To Leave France.’ ‘But in most cases, it was discussed with their company and agreed to limit salaries during the two years and come to an arrangement afterwards,’ he told Reuters by telephone.”
|By Paul Vigna, The Wall Street Journal, 12/23/2014|
MarketMinder's View: This attributes all the bond and stock market movement since last Wednesday to the Fed meeting and the language used in the statement, which said the FOMC will take a “patient” approach toward hiking rates, but that it will also weigh incoming economic data, which some take as conflicting. In our view, though, this is a whole lot of searching for meaning in uppy times and searching for hidden meaning in Fed obfuscation. What’s more, it’s a near-totally worthless exercise, considering there isn’t any history suggesting stocks will be automatically negatively affected by an initial rate hike. For investors, this is noise.
|By Agency Staff, China Daily, 12/23/2014|
MarketMinder's View: It seems China’s local governments have found a solution to the central government’s new crackdown on their complex funding arrangements: just float some foreign bonds and let investors determine how expensive they should be. Looks like a market is developing. We wouldn’t go rushing into it headlong or anything, but over time this should bring another dose of modernization to China’s capital markets.
|By Danielle Kurtzelben and Dylan Matthews, Vox, 12/23/2014|
MarketMinder's View: If you’re looking for a good way to pass the time with family this week and next, here is MarketMinder’s guide to nerdy family fun:
1. Round up your parents, siblings, aunts, uncles, kids, cousins, neighbors or whoever else is around.
2. Make a giant pot of hot cocoa (or for grown-ups, whip up some wassail, glühwein or hot toddies).
3. Pop open one of these seven games and have at it.
Sure, board games aren’t perfect proxies for real-life economies and markets—they’re fixed pies, with static money supply and no potential for invention or technological solutions to make limited resources go further. But that is a small caveat to what is otherwise a keen observation about all seven of these delightful games. This blurb’s author grew up on the first four (Monopoly, Life, Scrabble and Acquire) and can personally vouch for the lessons they teach about the tradeoffs between risk and return and the power of trade. They are also fun!
|By Debarati Roy, Bloomberg, 12/23/2014|
MarketMinder's View: So the theory here is gold is a hedge against inflation, and since falling oil prices are weighing on headline inflation, gold is down. Trouble with the theory? Well, gold has been down since, we don’t know, 2011. Oil was flat for most of that time and only really started falling in June of this year. Since June, oil prices are down nearly -50%. Gold is down -4%. Inflation, on the other hand, has been fairly stable at low rates throughout. Doesn’t seem to be that much to this theory, is all we’re saying. Besides, when you figure inflation has risen since 2011, you’d think an effective hedge against it should have risen, too. But gold is down significantly, so you know, bad hedge.
|By Ambrose Evans-Pritchard, The Telegraph, 12/22/2014|
MarketMinder's View: Well, we disagree with the claim that Russia faces a worse situation today than in 1998—oil prices were far lower then, and Putin does have over $400 billion in currency reserves today, so a Russian default isn’t likely. One similarity is that neither then nor now are ripples being felt much outside Russia. But that minor quibble aside, here is a highly engaging and informative article about the situation in Russia and how it really isn’t new or unique in the annals of the Russian “economy.”
|By Jonathan Clements, The Wall Street Journal, 12/22/2014|
MarketMinder's View: Well, this is basically internally contradictory and rather bizarre advice at that. It suggests you shouldn’t act on any market forecast, and then it suggests you act on two: One projecting the 10-year future of inflation and stock and bond returns, the other implicit in the statement that, “If you think you might panic and sell during a market decline, you should sell now, while prices are still at lofty levels.” Something cannot be lofty if you don’t expect it to get lower. But also, it’s amazingly bizarre to tell someone to sell merely because they might sell at a worse time. It’s also bizarre to advise them to hold 5-10 years of cash flow in bonds or cash-like vehicles. How about if you counsel them to focus on their long-term goals and turn off the financial news? Then, again, this does provide the wise comment that hiring a good adviser can help you avoid the biggest possible mistake, which is sage.
|By Jonathan Clements, The Wall Street Journal, 12/22/2014|
MarketMinder's View: Well, this is basically internally contradictory and rather bizarre advice at that. It suggests you shouldn’t act on any market forecast, and then it suggests you act on two: One projecting the 10-year future of inflation and stock and bond returns, the other implicit in the statement that, “If you think you might panic and sell during a market decline, you should sell now, while prices are still at lofty levels.” Something cannot be lofty if you don’t expect it to get lower. But also, it’s amazingly bizarre to tell someone to sell merely because they might sell at a worse time. It’s also bizarre to advise them to hold 5-10 years of cash flow in bonds or cash-like vehicles. How about if you counsel them to focus on their long-term goals and turn off the financial news? Then, again, this does provide the wise comment that hiring a good adviser can help you avoid the biggest possible mistake, which is sage.
|By Daniel Kruger, Bloomberg, 12/22/2014|
MarketMinder's View: Many feared the US government’s borrowing costs would surge after the Fed stopped increasing its holdings of Treasurys. But despite the Fed “tapering” its bond buying program beginning in January 2014 (and ending it in November), interest rates are lower today than when the year began, as demand for US Treasurys remains high and supply relatively constrained as the shrinking deficit crimped bond issuance. And as mentioned here, that likely doesn’t change heading into the New Year.
|By William Watts and Joseph Adinolfi, MarketWatch, 12/22/2014|
MarketMinder's View: According to this article, “Gray swans are occurrences that aren’t wholly unpredictable, but are insidiously laying in plain sight.” In markets, if it is in plain sight, it is likely already reflected in stock prices. That is how markets work. Hence, none of these are actually major market risks as outlined here, unless they go some wildly unpredictable way, which would make them not a gray swan. (All these swan analogies are getting a bit tired, don’t you think?)
|By Zhou Feng, China Daily , 12/22/2014|
MarketMinder's View: “The deposit insurance system heralds the removal of the deposit rate floor, the very last step in China's interest rate liberalization. China has long established a deposit rate floor and although the rate has been allowed to rise by a certain range, the floor has never been scrapped, allowing banks to freely decide deposit rates.” This is another step in China’s long march toward a market-oriented economy, and if it turns out to be, “a prelude for [sic] the establishment of private banks,” that would be a big step for China, indeed.
|By Nektaria Stamouli, The Wall Street Journal, 12/22/2014|
MarketMinder's View: Developments continue unfolding in Greece after Prime Minister Antonis Samaras failed to get the 200 Parliamentary votes needed to elect Stavros Dimas as Greece’s next (largely ceremonial) president. Parliament will vote again Tuesday (and again on the 29th if they’re still deadlocked), and Samaras is in full bargaining mode: If lawmakers elect Dimas and avoid an immediate snap election, he’ll reshuffle his cabinet to include more independents and hold elections before 2015 ends, earlier than his term technically expires (but, for good measure, after the latest round of bailout negotiations is over). Will it work? Who knows—the anti-austerity Syriza Party, which is trying to stonewall the presidential vote and force the snap election (not coincidentally, they lead polling), might counter with its own shiny promises to independent lawmakers. Regardless, this is mostly a distraction for global investors. While some fear this saga might end with the current government out and Syriza in charge, a) that’s all speculation and b) Greece’s issues are mostly Greek anyway. For more, see our 12/10/2014 commentary, “The Greek Gambit, Redux.”
|By Chris Isidore, CNN Money, 12/19/2014|
MarketMinder's View: When the government launched the Troubled Assets Relief Program, or $700 billion bailout, at the height of the financial crisis in October 2008, many folks thought this was money being flushed down the drain; free cash for Wall Street, no strings attached. But the reality is very different, as shown now that the books on TARP are closed. The bank bailout part of TARP turned a nice profit. The automaker part was in the red along with the so-called “homeowner bailout” programs. Now, whatever the gain or loss, we’d suggest that this program didn’t successfully achieve its aim: Stabilizing the financial system. It was a key part of the government’s haphazard response that roiled markets after FAS 157 had spent a year wrecking bank balance sheets unnecessarily. Oh and hey, forget all that rhetoric about “profits for taxpayers” or what have you. We’d suggest holding your breath while waiting for your share of the US government’s $15.3 billion profit from TARP isn’t good for your health.
|By Jason Zweig, The Wall Street Journal, 12/19/2014|
MarketMinder's View: A mish-mosh of misperceptions here. It starts with the suggestion stocks are extremely expensive and bound to fall sooner than later because the cyclically adjusted price-to-earnings ratio (CAPE) is high and stocks bounced back off of recent volatility too fast to become “cheap,” which presumes a) P/Es are predictive b) cheap stocks do better and c) the CAPE shows you stocks are cheap. None of these are accurate. But the advice to avoid the temptation to “do something” because of energy-driven volatility is highly sensible: “The sharp and swift recovery shows the importance of not reacting to every blip in the market.” However, the tail end of the article eschews this advice anew. For more, see our 12/18/2014 commentary, “Vexing Volatility.”
|By Staff, Reuters, 12/19/2014|
MarketMinder's View: This highlights an excellent point often overlooked amid consternation surrounding China’s recent slowdown: Even at lower growth rates, China still contributes tremendously to global economic activity. What’s arguably more important than a high rate of growth is that China continues growing and gradually shifting its economic focus from an infrastructure-driven economy to one that is more consumer- and services-oriented, as most developed-world economies are. Particularly when the growth rates in question are in the 7% range on the low end—an enviable figure relative to much of the rest of the world.
|By Floyd Norris, The New York Times, 12/19/2014|
MarketMinder's View: This piece confuses correlation with causation, in our view—simply because two events seemingly corresponded in time doesn’t necessarily mean one caused the other absent a logical, causal link. Do markets require sensible regulation? Absolutely. Absent well-reasoned rules of the game, no free market can efficiently operate. However, the key word is “sensible”—and to presume politicians of any stripe are capable of effectively regulating every possible risk out of markets is to give them far too much credit. Rather than blame insufficient regulation for every past downturn, we’d suggest market cycles are far more tied to behavioral psychology and the way our brains have been wired for millennia. As humans, we often allow emotion to drive decisions—which sentences us to periodic irrational exuberance and irrational pessimism, regardless of whether Washington has forbidden it. Finally, we’d note there is more evidence a regulatory change—FAS 157—was at the heart of 2008 than deregulation.
|By Laura Saunders, The Wall Street Journal, 12/19/2014|
MarketMinder's View: Given government gridlock following the midterm election, the likelihood significant legislation is passed is meaningfully lower. Particularly legislation likely to be more polarizing—and tax discussions often fall into that camp. Then, too, consider the fact similar changes to IRA and Roth rules and tax benefits were considered as part of the Obama Administration’s 2014 budget, which died on the vine when his party had one chamber (the Senate). The likelihood Congress passes legislation fundamentally altering the tax status of certain retirement accounts is very low.
|By Chelsey Dulaney, Dow Jones Newswires , 12/19/2014|
MarketMinder's View: Are you surprised Venezuela’s feeling the pain of falling oil prices right now? Right, we’re not really either. We—and most investors, we’re betting—are also not very surprised credit-ratings agencies are only now adjusting ratings on a nation that is heavily dependent on oil. All this is really more of an illustration of the feckless state of the raters. It’s unlikely to have a terribly meaningful impact on either Venezuela’s already challenging economic situation or global markets.
|By Andrew Ackerman, The Wall Street Journal, 12/19/2014|
MarketMinder's View: We’ve long suggested the Volcker rule is mostly a solution in search of a problem. And it’s gone through several iterations, re-writes, edits and delays since its initial discussion in 2010—all while the US financial system’s health has improved dramatically and stocks have overall risen. At this point, the Volcker Rule’s basic outline is well known, with the separation of trading and commercial banking having been discussed for about five years, written in law for four and implemented for about a year. For the most part, banks have adjusted as necessary to exist in a post-Volcker world, making any further political dithering largely fodder for headlines. And a recipe for irritated namesakes.
|By Staff, Bloomberg, 12/18/2014|
MarketMinder's View: Nice graphics—flashy!—but this holds little value for investors looking towards 2015. The things that would potentially be big and bad—like the US, Russia, Norway and Denmark fighting over mineral rights in the Arctic or Putin invading the Baltics seem highly unlikely. Of the other fifteen “threats” listed here, most are unsurprising and/or too small to hit global stocks and/or unlikely to happen. There are several permutations of regional wars in the Middle East. Saber-rattling in Asia? Grexit? Look, it might be terrible to say, but nothing in Nigeria is likely to cause a global bear market. This would be more appropriately labeled, “An Extreme Pessimist’s Speculative Guide to the World in 2015.”
|By Rich Miller, Bloomberg, 12/18/2014|
MarketMinder's View: Well folks, it has been a considerable time since we’ve had a new Fed phrase for the financial media punditry to dissect and speculate about, but it seems Janet Yellen has given us a new word to monitor in 2015: Patient! It is a great word and a quality we recommend to all long-term investors. However, its presence in a central banker’s speech shouldn’t cause you to change your market outlook. The Fed will hike rates when it hikes rates—and history has shown that a rate hike isn’t an automatic negative for the economy or markets. For more, see Elisabeth Dellinger’s column, “Considerable Wrangling Over Considerable Time.”
|By Neil MacFarquhar and Andrew Roth, The New York Times, 12/18/2014|
MarketMinder's View: Well technically, Mr. Putin isn’t wrong—his country’s energy-dependent economy is completely at the mercy of oil prices, and thanks to rising global supply, prices have been nearly halved since June. As a result, the ruble’s slid the whole year, and despite the Central Bank of Russia’s efforts, plunged this week. But Russia’s tsar, er, president seems to suggest that evil speculators conjured up by “the West” are working against the Motherland. Which is a whole lot of Russian politicking likely designed to make folks overlook the weak economy out of patriotism. We’d suggest Russia’s current struggles needn’t imperil the global economy at large. For more, see our 12/17/2014 commentary, “The Red Scare.”
|By Tom Randall, Bloomberg, 12/18/2014|
MarketMinder's View: Well, this is all about future investment in oil production that the “bankers” estimate won’t happen over the next decade. So it’s a long-term forecast (shaky) and one that products production growth in 2015. There really is no such thing as a permanently “stranded asset”—one that is uneconomical to extract. Technology gets better, lowering breakevens. Lower prices probably bring more demand. And if production growth slows, as the article notes, prices likely rise thereafter. All this fancy talk really just illustrates how the market has always worked and why the market works, pure and simple.
|By Martin Crutsinger, Associated Press, 12/18/2014|
MarketMinder's View: More positive news for the US economy: The Conference Board’s Leading Economic Index (LEI) rose for the ninth time in the past 11 months, up 0.6% in November. Eight of 10 indicators increased, with the two biggest being the interest rate spread and the ISM new orders index—forward-looking signs growth likely continues rolling into the new year.
|By Joshua M. Brown, The Reformed Broker, 12/18/2014|
MarketMinder's View: This is a good reminder for investors who may be tempted to chase heat based on the news about Cuba: “But Cuba, when all is said and done, will continue to be a frontier market, with total annual GDP of $72 billion and per capital income of just $10,500. If there is a lasting boom in that country, you will have plenty of time—no need to chase this fund up 30% this afternoon.” To take this concept broader, this is just the latest example of Fad investing you should avoid. Here are some earlier examples: Bitcoin; Marijuana-related firms; some social media firms. Maybe someday those will be big, investible opportunities, but they aren’t now. Searching for The Next Thing to Go Huge and Viral in markets is speculating, not investing.
|By Mehreen Khan, The Telegraph, 12/18/2014|
MarketMinder's View: The nine charts here offer a potpourri of backward-looking, late-lagging, wonky and speculative claims for why Greece should leave the eurozone today. Employment. Past GDP comparisons. The trade deficit. Debt levels. Emigration. Surveys and political polls. Where is the sign any of these would actually improve if Greece left the euro? Sure, if they had their own currency, they could monetize the debt. Grrrrrrrrrrrrrrrrrrrrrreat. That’s not exactly a recipe proven to generate jobs, exports or competitiveness. And that last word is key—competitiveness. Because Greece’s issues are not that they are in a currency union. They are that this nation has decades of history of structural economic issues. Now, this also buys much too heavily into the theory a potential election may put an anti-austerity (not anti-euro) party in power who the EU/IMF/ECB troika might not negotiate with, possibly leading to a “Grexit.” For more, see our 12/10/2014 commentary, “The Greek Gambit, Redux.”
|By Neil Irwin, The New York Times, 12/17/2014|
MarketMinder's View: What’s charted here is actually the Ruble/Dollar exchange rate since September, WTI crude oil prices since mid-November and 10-year US Treasury yields since January. So, you know, not 24 hours. But that’s a minor quibble and one we’ll happily pardon since headlines’ purpose is to get clicks and, well, it worked! The larger issue here is with the thesis, which is more or less that Russia’s predicament is terrible for Russia but good for America, because falling oil prices plus a flight to safety is pulling down interest rates, making mortgages cheaper. Which is sort of the old quantitative easing (QE) argument all over again. Maybe low long rates do stimulate demand for loans! But they also flatten the yield curve, which generally makes banks less eager to lend. Low-rate loans aren’t as profitable. Now, the yield curve is steeper today than it was last May, before all the chatter about QE ending drove long rates higher. That’s good! And the US did overall fine during QE despite the flattish yield curve, historically low loan growth and falling M4 money supply. This shouldn’t upend the expansion or anything. It’s just faulty logic, which we feel compelled to point out in our never-ending quest to make the world a better place.
|By Dunstan Prial, Fox Business, 12/17/2014|
MarketMinder's View: OK let’s talk about this one. It claims the clock starts ticking whenever the Fed removes language stating rates won’t rise for “a considerable time” from its policy statement—and “considerable time” means “six months,” so if the Fed redlines that verbiage today, you should mark your calendar for a mid-2015 hike and commence whatever freak-out ritual you prefer. Here are two reasons why that is rather useless advice. One, the first rate hike in a tightening cycle isn’t inherently negative—history shows stocks and the economy fare fine. Two, the “six month” thing is based on a goof by Fed Chair Janet Yellen during one of her first press conferences, where she forgot that Fed people are supposed to be vague. Since then, she has been quite non-specific on timing.
March 19: “So, the language that we use in the statement is “considerable” period. So, I—you know, this is the kind of term—it’s hard to define. But, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends.”
June 18: “So what I want to say, the guidance that I want to give you, is that there is no mechanical formula whatsoever for what a “considerable time” means. The answer as to what it means is, it depends. It depends on how the economy progresses.”
September 17: “I do not think we have any mechanical interpretation that applies to this. It, of course, gives an impression about what we think will be appropriate, but there is no mechanical interpretation. … And it is important for markets to understand that there is uncertainty, and this statement is not some sort of firm promise about a particular amount of time.”
BREAKING NEWS: “Considerable time” is still in the statement, only a sentence later. The Fed added “we’ll be patient” and basically said these things are synonymous. So yah, more meaningless noncommittal obfuscation. Seems about right.
|By Richard Rubin, Bloomberg, 12/17/2014|
MarketMinder's View: Yes, our friends (?) in the 113th Congress fiiiiinally got around to renewing the dozens of mini tax breaks that expired earlier this year, giving Americans 13 days of clarity on their IRA required minimum distributions, charitable donations and other fiscal nuances. Quick! Call your tax adviser! But don’t plan for next year just yet, because they all expire again on January 1, giving the 114th Congress the pleasure of haggling over an extender for 2015 and maybe beyond. Now, we expect them all to be renewed again eventually, as they always are. It would probably be helpful if they’d just make the things permanent already, but that would rob them of one of their favorite campaign wedge issues, and we can’t have that! Anyway, in short, it’s all theater. But really, quick, call your CPA!
|By Dan Murtaugh and Lynn Doan, Bloomberg, 12/17/2014|
MarketMinder's View: So this is interesting but sort of misses the point: This conversation would never happen when oil prices were high, because politicians would be worried about blowback from voters (most assume exports mean higher prices—see here for more on why that isn’t true). Exports are much easier for folks to digest when oil is in the $50s than when it is over $100 and gas prices average somewhere in the $2s, depending where you live. None of this changes the fact that the export ban is a largely political issue that is well past its use-by date. When the US is one of the world’s top oil producers and drowning in a crude surplus, we just don’t need an export ban that originally aimed to shore up supply during the OPEC embargo in the 1970s.
|By Peter Eavis, The New York Times, 12/17/2014|
MarketMinder's View: In all likelihood, no, falling oil prices and issues in Russia likely won’t test whether regulators’ efforts have made the global financial system more panic-resistant. For one, junk bonds have been under pressure, but this is mostly confined to Energy firms and very speculative ones at that. The likelihood this creates a panic akin to 2008 is extremely small, considering the total exposure is about $200 billion (it took trillions of writedowns to create 2008); Energy firms hedge against falling prices; not all the junk bonds are issued by companies reliant on oil—some drill for natural gas, which is up year-over-year; and oil prices at present levels don’t put all these firms in the red—breakevens vary. As to the Russia concerns, banks in the US aren’t very connected to Russia, and even European banks have relatively limited exposure. Additionally, Russia itself has over $400 billion in forex reserves at the Central Bank of Russia, which it could use to forestall default if it chose to—that amount is sufficient to cover the next 12 months’ maturing dollar-denominated sovereign debt about three times over, so a default just isn’t likely. And even if it did default a la 1998, as many fear: 1998’s Russian Ruble crisis and Asian regional recession didn’t go global and didn’t create a financial panic. We may not know if Dodd-Frank, Basel III and the like strengthened the financial system for decades—while recessions are a regular occurrence, widespread bank runs and panics are fairly rare in the modern era.
|By Staff, AFP, 12/17/2014|
MarketMinder's View: Today in totally unsurprising news, Greece’s government didn’t corral enough votes in Parliament to elect its handpicked Presidential candidate. They needed 200 of 300 votes and got just 160. Round two is next Tuesday. Round three, if necessary, is December 29, and the required votes drops to 180. If that fails, Parliament dissolves, and it’s general election time. Some say that would spell the end for Greece in the euro, as the anti-austerity Syriza party leads polls, but that seems hasty. IF it comes to a snap election, voters could moderate during the campaign, just as they did in 2012. If they don’t and Syriza wins, they could moderate, too—just as they have since 2012, replacing anti-euro rhetoric with anti-bailout rhetoric. And if they don’t and Greece leaves the euro? Considering how long folks have feared and chattered away about this outcome, markets have likely long since discounted that possibility. See our 12/10/2014 commentary, “The Greek Gambit, Redux,” for more.
|By Keith Bradsher, The New York Times, 12/17/2014|
MarketMinder's View: Welp, it seems as though the US now plans to make solar energy even more expensive than it was before by increasing the taxes charged on solar panels imported from China. (Odd, given our government’s stated policy aim of seeking to expand the use of renewable energy.) The good news here is these tariffs, now nearly two years old, haven’t evoked a major retaliatory tariff from China—and, China’s comments here don’t allude to that changing. Tariffs on solar panels are a tiny matter unto themselves, given green energy accounts for a tiny slice of the US or Chinese economies. Which means that if this had erupted into a trade war, it would have been arguably the dumbest trade war of all time.
|By Andrea Thomas, The Wall Street Journal, 12/17/2014|
MarketMinder's View: In a long-awaited ruling, Germany’s Federal Constitutional Court struck down a 2009 amendment to inheritance laws permitting family-owned businesses to be passed from generation to generation without tax, providing the firms ensured they wouldn’t slash employment. It is estimated that about 92% of German firms are family-owned and would theoretically qualify for this exemption. However, before fretting the impact of this legislation, we feel compelled to note that the Court’s ruling basically cites a technicality, claiming the thrust of the law wasn’t unconstitutional and gives the government until mid-2016 to revise it.
|By Staff, Reuters, 12/17/2014|
MarketMinder's View: That apparently ginormous decline would be a -0.3% month-over-month drop in headline CPI, slowing the annual inflation rate to 1.3% (from 1.7% in October). Not surprising, considering oil prices’ continued plunge. Core CPI, which strips out energy and fresh food, rose 0.1% month over month—slowing from October’s 0.2%—bringing the year-over-year figure to 1.7%. Will that change the Fed’s plans? Who knows! That question assumes the Fed had actual plans, which we are darned skeptical of. The FOMC is 10 humans who meet behind closed doors to discuss their reactions to the latest economic data. Then they make decisions and write wordy, obtuse press releases based on those interpretations. Folks, they’ll hike when they hike. That’s it.
|By Staff, The Yomiuri Shimbun, 12/17/2014|
MarketMinder's View: Why the range? The Economy Ministry wants a 2.5-point cut, while the Finance Ministry wants 2%. Apparently they’re “seeking a middle ground,” but no word on whether that means a 2.25-point cut—but they say we’ll know by December 30, after which this likely goes to the full Parliament for approval. More interesting, though, is the behind-the-scenes wrangling over how to fill an estimated ¥1.1 trillion tax revenue shortfall. Proposals include a supertax on company size (unclear whether this means market cap, total assets or total liquid assets), reducing the allowance for loss carry-forwards and raising the dividend tax on corporations’ equity holdings. Which makes us wonder: How does reducing the corporate tax rate make Japan more competitive if firms will just get hit another way? Seems like another watered-down reform attempt, not the sort of deep change key to revitalizing Japan in the long run. Markets have long expected more.
|By Jim Brunsden, Bloomberg, 12/17/2014|
MarketMinder's View: So much for EU finance commissioner Jonathan Hill’s private letter saying this thing would die if member-states remain lukewarm on it—now he’s publicly saying he’ll press on with proposed rules to ringfence banks’ investment banking and retail banking operations, banning more proprietary trading in the retail arm. This is sort of a mashup of the US’s Volcker Rule and UK’s Vickers Rule, and it’s a solution in search of a problem if the aim is preventing another 2008. Diversified megabanks with big retail and trading arms held up ok back then, and governments told them to get even bigger by buying up failed investment banks like Bear Stearns and failed savings banks like WaMu. Narrow institutions were the ones that failed. Plus! Trading losses were nowhere near loan losses, which were nowhere near the nearly $2 trillion in largely unnecessary writedowns. All those factoids make these rules largely just (expensive) window-dressing, though, banks can live with them, as they currently are in the US and UK. All that said, though, there is no reason Hill can’t change his mind again, and the EU’s lawmaking process dictates that all member states must approve of stuff like this. So even if he wants it really badly, if national governments don’t, it dies.
|By John Kemp, Reuters, 12/16/2014|
MarketMinder's View: Here is an excellent article illustrating how oil producers do not necessarily respond with immediacy to even very large changes in oil prices with altered production. Simply put, this is a long-cycle industry, where huge costs, time and effort are sunk into finding and extracting oil from the ground. You may see new investment get curtailed—that would be natural—but firms sharply ratcheting down current output seems unlikely.
|By Greg Robb, MarketWatch, 12/16/2014|
MarketMinder's View: “Despite widespread reports to the contrary, the Federal Reserve might retain its policy-statement pledge to the market that it will wait a ‘considerable time’ before hiking interest rates.” Way to go out on a limb! They “may” or “might” choose to keep a couple words! While we’re at it, Janet Yellen may sing her prepared remarks in a high falsetto! She might choose to tweet the entire statement. She might decide not to release a statement after all. All those are possible. But you can’t really even gauge the probability of anything the Fed will do, as the cabal of 12 FOMC members isn’t a gameable market function. Which is ok, because an initial rate hike just isn’t historically a negative for stocks.
|By Szu Ping Chan, The Telegraph, 12/16/2014|
MarketMinder's View: They are: Falling oil prices (because they create a deflationary spiral), housing bubble, Russian aggression, another eurozone downturn and banks’ vulnerability to a downturn and, um, cyber threats. All are false fears and overstated. Like, it’s a myth that slowly falling prices incent consumers to perpetually put off purchases in hopes of a better deal tomorrow, sinking consumption. After all, it’s not like the US and UK shrank massively during the overall DEflationary Industrial Revolution. The UK doesn’t have a housing bubble, just a supply shortage in London. The eurozone probably stays in its choppy, uneven growth phase, which is way better than people expect. Vladimir Putin’s adventures have proven powerless to affect the global economy for a year now. Two big banks just barely passing arbitrary government stress tests (which were based on balance sheets as of 12/31/2013) doesn’t say anything about actual vulnerability during an actual crisis that probably won’t look anything like the BoE’s stress test parameters. The UK isn’t riskless! But these issues aren’t the sort of big, surprising negative typically necessary to knock stocks off course during a bull market.
|By Joseph Cotterill, Financial Times, 12/16/2014|
MarketMinder's View: Here is some perspective on Russia’s big 6.5 percentage point rate hike announced last night—and an interesting counterpoint to fears of the current Russian weakness evolving into a 1998-style currency collapse. “Some historical context to place Monday evening’s 650bps move in Russia, big as it was, in some perspective. The central bank lending rate in the 1998 Russian crisis was just a little nuttier. The CBR [the Russian Central Bank] hiked from 30 per cent to 150 per cent between May 19 and May 27 that year. To say nothing of the scale of rate moves, this was a very different crisis back then; when the Yeltsin government faced plummeting tax revenues, oil prices were halving (from $23 to $11 a barrel) and sovereign default was on the way given reserves were distinctly outnumbered by the debt. And ultimately, the CBR failed.”
|By Park Si-soo, The Korea Times , 12/16/2014|
MarketMinder's View: On the one hand: The more the merrier, and yay for free trade! On the other: More participants means more complex negotiations, and the Trans-Pacific Partnership is already stuck in diplomatic purgatory. If it comes together and includes Korea as well, it’s a long-term positive for the US and other participating countries. But it seems awfully optimistic to expect this thing to be done next year, considering the many twists, turns and stalemates thus far.
|By Staff, Yomiuri Shimbun, 12/16/2014|
MarketMinder's View: A good, concise look at the challenges facing Japan after Prime Minister Shinzo Abe renewed his supermajority over the weekend. “To push his growth strategy forward, it will be necessary to break through the bedrock regulations industrial organizations have tried to defend desperately to maintain their vested interests.” But, Abe has some distractions, like his lifelong ambition to erase the anti-war clause from Japan’s Constitution and restore his nation’s military might: “With his long-term government increasingly becoming a real possibility, Abe set constitutional revision as his ‘target and belief.’” So, we’re rather skeptical about this: “‘We have no time to sit back and relax. We have to get down to business right away.’ Abe said this as he directed Akira Amari, state minister for economic revitalization, to accelerate compilation of economic measures after summoning him to the Prime Minister’s Office on Monday.” Abe has sung that same tune for two years now, and yet: “The Abenomics economic policy package pushed by the Abe administration seems to be losing steam due to the delay in conveying its effects to regional areas.” For more, see today’s commentary, “Now What?”
|By Thomas H. Kee, Jr., MarketWatch, 12/16/2014|
MarketMinder's View: The thesis here appears to be that December is usually good but may not be this time, which may indicate where stocks go in 2015 or may not. Now, none of that really means anything, and there are effectively no takeaways from this piece. And in that way, it’s a sensible article after all, because there is no takeaway from December’s market action, and none of it means anything about the future—past performance won’t predict. But also, we would strongly suggest that “cost-basis improvement” or strategies “designed to control risk and reduce cost basis” aren’t really things—they confuse and conflate cost basis with buying on the dips, which is a poor, short-term oriented strategy, anyway.
|By Huang Xiangyang, China Daily, 12/16/2014|
MarketMinder's View: Euphoooooooooooria! This is what it looks like, folks: “You are totally out of touch if you do not talk about stocks these days in China. The bull run on the mainland equity market and the perceived wealth effect that goes along with it have made it hard for even the least-interested investors to remain aloof. … The spring of China’s equities market has arrived, enthusiastic pros claim, with many pointing to a benchmark high of 4,000 or even 5,000 points in the coming year, up from about 2,900 at present. ‘The only limit is your imagination,’ one famous financial blogger wrote.” Now, this article goes on to highlight many reasons not to get carried away, and we aren’t saying Chinese stocks are in a euphoric peak. But if you want to know what irrational exuberance looks like, it’s professional forecasters predicting a 72.4% gain next year.
|By Chris Giles, Financial Times, 12/16/2014|
MarketMinder's View: There is a lot of good information here, and anyone wondering about which countries benefit from lower oil prices (and which nations get whacked) should give it a read. However, it has some flaws—namely, it falls prey to the widely held myth that low oil prices are economic stimulus globally and specifically in nations that aren’t oil-dependent. While falling oil prices do have some benefits, like reducing gas prices and some energy costs for businesses, they don’t really give consumption a net boost. Spending usually just shifts from gas stations (not fun) to more discretionary goods and services (fun). It’s not like low oil prices give folks more money to spend overall, ya know? It is also basically impossible to know they’ll actually spend it. They might save it or pay down debt with any cash freed up by lower fuel prices. Now, that isn’t to say those things are economically bad, they are just decidedly not the things most folks think are so juicy about low oil prices.
|By Kristina Peterson and Siobhan Hughes, The Wall Street Journal, 12/15/2014|
MarketMinder's View: Hey look! Congress passed something! Which actually isn’t that surprising. Nor is it all that surprising the spending bill’s passage came at the 11th hour. The bill now goes to the President’s desk for the final John Hancock, which he says is forthcoming. So you know, no government shutdown, for all you government-shutdown fans. Though, it is interesting to us to note the different media and general reaction to the threat of a shutdown. Last year, leading up to the 16-day government shutdown, many shuddered over the potential impact on darn near everything and everyone. This year, the focus was largely on what Congress was looking to attach to the bill, not what would happen if the government shut down again—a sign of improving sentiment and a much more rational way to perceive a shutdown, because they are largely ineffectual.
|By Joshua M. Brown, The Reformed Broker , 12/15/2014|
MarketMinder's View: “They” refers to the intrepid journalists who make a living reporting on daily market movement, and “it all” refers to the rationale often given for wiggles and waggles: “They’re watching market prices fluctuate and assigning meaning where none exists. Stories are being told and headlines are being crafted so that there is something for you to click on from your app when you check the news. There is nothing to be mad about, it is what it is. But the sooner you learn this lesson, the savvier a consumer of financial news you’ll be.” 99.9999% of the time, there is no way to truly know what causes short-term volatility. We suggest tuning out the noise and looking forward.
|By Chuck Jaffe, MarketWatch, 12/15/2014|
MarketMinder's View: Four decent pieces of advice here: Only buy securities from registered professionals; keep an eye out for complicated investments or strategies (you should understand it well enough to simply explain it easily to someone else); be realistic when it comes to risk and returns—nothing can be low risk and high returning; and vet your advisers well enough to earn your trust before hiring them. These are all good, but we would add one very simple, clear-cut one: Be wary of an adviser who makes your investment decisions and takes custody of your assets. This gives them access to your money, and it isn’t necessary—you should demand your assets are held at a major, third-party brokerage house in an account in your name that you can access anytime. This is a major preventive measure and a crucial one. For more, see our commentary here.
|By Staff, The Yomiuri Shimbun, 12/15/2014|
MarketMinder's View: Japan went to the polls on Sunday in the snap election Prime Minister Shinzo Abe called after delaying next October’s scheduled sales tax hike, the second in two years. As was expected by basically everyone, Abe’s Liberal Democratic Party/New Komeito coalition government gained, increasing its majority from 325 of the lower house’s 480 seats pre-election to 326 of 475 seats after. Now, many in the press are hailing this “mandate” as key to Abe’s implementing the more contentious reforms so notably absent from his “Abenomics” plan of fiscal stimulus, monetary stimulus and structural reform. But we ask you: Is one more seat really so key? The coalition had a supermajority before and no reforms came. We are skeptical this is really anything other than a classic Japanese political move designed to maintain party power for longer. Should that prove true, we would suggest Japanese stocks will continue sliding down the slope of hope. (The Wall of Worry’s dastardly, negative cousin.)
|By Paul Krugman, The New York Times , 12/15/2014|
MarketMinder's View: OK party people! What time is it? Time to set aside your political bias to assess the potential impact of a Dodd-Frank rule change that was tucked into the fun-sounding Cromnibus act that passed Saturday night. The original rule required FDIC-insured institutions to move 5-10% of their swaps trading to uninsured subsidiaries. The amendment moves only a portion of that 5-10% back. Besides, there is no evidence this would have any beneficial impact in a crisis nor would this have prevented the mark-to-market accounting and bizarre government action-driven 2008 financial crisis. For more, see our commentary here. Also, it isn’t all that likely that major changes (positive or negative) are made to Dodd-Frank. We have a gridlocked government overall. This happens to be one change that had broad agreement, largely because the costs were clear and the benefits generally acknowledged to be lacking.
|By Staff, Reuters, 12/15/2014|
MarketMinder's View: Our take on this one is pretty simple: Watch what policymakers do, not what they say. There is no point in parsing over Fed verbiage, as words can and do change. But also, even if you could glean some hint about when a rate hike might happen from this sort of stuff, history shows rate hikes don’t tend to automatically produce negativity. There is no if-then equation to Fed policy and stocks. Also, can you really call something a “wild card” for financial markets when it is scheduled and has been the subject of billions of pixels worth of speculation?
|By Barry Eichengreen, The Guardian, 12/15/2014|
MarketMinder's View: If quantitative easing (QE) is “The Answer,” we wonder what the question is? How to slow lending? How to reduce inflation? How to unstimulate an economy? How to use a fancy-sounding central bank strategy that accomplishes none of its stated goals? That is QE’s actual track record in Japan (both now and in 2001 – 2006), the US and UK. Over a century of economic theory shows flattening the yield curve discourages lending, which means the reserve credits central banks create never amount to increased money supply. If anything, QE would spur the “spectre of deflation” by weighing on money supply growth even more, rather than be the panacea suggested here. Finally, we must point out part of the low inflation read seen presently is the result of vast increases in commodity (energy, raw materials) supply. Very little that the ECB can do is going to boost oil prices. Now then, EU nations could tax oil more—which would certainly raise the price—but if you tax something (spending on gas/energy) you also get less of it. So you know, that probably isn’t so stimulative, either.
|By Jason Zweig, The Wall Street Journal, 12/12/2014|
MarketMinder's View: If you are considering hiring a professional to manage your assets or give you investment advice, read this. If you are wondering whether your current adviser is on the up and up, read this. If you want to see a great piece of writing about the financial services industry, read this. It starts with a timeless reminder to do thorough due diligence, then shows exactly what that looks like. Ending with this gem: Create a hypothetical portfolio of global stocks and bonds, with ETFs just to make it easy. Then show it to the adviser and see what they’d recommend changing. “If his answer is hesitant, long, complex, or includes the words ‘tactical’ or ‘insurance products,’ he probably makes investment management more difficult than it needs to be.” We’d only add that overly complex strategies described in jargon you can’t understand is a classic sign of fraud.
|By Len Boselovic, Pittsburgh Post-Gazette, 12/12/2014|
MarketMinder's View: Some manufacturing has moved to China since the Middle Kingdom joined the WTO. That is a fact. But you can’t quantify the exact impact on US jobs, since technology also played a large role there—you can’t isolate any one variable. Plus, not having seen the actual study, we have to ask: Did they account for the jobs created by higher imports from China? Longshoremen at our seaports? Retail employees? Local workers to service whatever we imported? Anyway, more to the point, this is all backward-looking, and it clearly hasn’t prevented the US economy—or total jobs—from growing over time. This study merely highlights a sociological issue, outside of markets’ sphere. (Unless politicians try to “do something” about it. Then, let’s talk.)
|By Darrow Kirkpatrick, Time, 12/12/2014|
MarketMinder's View: “Need” is in the eye of the beholder. There are plenty of alternatives if you’re trying to figure out whether your savings can last your lifetime. But calculators are widely used and can help you set expectations if you understand their limitations—and know the good ones from the bad ones. That’s where this article comes in, showing all that’s wrong (and occasionally right) with these online tools, along with how and how not to use them. If you’re saving for, near or in retirement and trying to plan, this is a must-read.
|By Mark Gilbert, Bloomberg, 12/12/2014|
MarketMinder's View: Why fear? Because, we are told, the Fed dictates “everything from how much your car loan costs to whether the stock market rises or declines.” Car loans, yes, to an extent. Stocks, no. Monetary policy is one variable markets weigh, and there is no set relationship between rate movements and stocks. The rest of this veers into fearing rate hikes will trigger a panic because debt is way up since 2000. Thing is, it isn’t like all existing debt gets way more expensive when rates rise. With the exception of a few variable-rate loans, rates get locked in at issuance. US Treasurys will keep paying what they always paid. Rate hikes affect NEW bonds and loans. That’s it. (Oh and history shows the first rate in a tightening cycle isn’t bad for stocks.)
|By Yuka Hayashi, The Wall Street Journal, 12/12/2014|
MarketMinder's View: We were going to preview Sunday’s Japanese election, but there isn’t any point—the Liberal Democratic Party and coalition partners look poised to run away with the thing, resulting in the status quo. So instead we give you this fascinating piece, which is not overtly market-related but shows why those expecting the election to boost the chances of economic reform are probably too optimistic. Prime Minister Shinzo Abe’s lifelong ambition is to restore Japan’s military might, and he has spent significant political capital on that goal. More than he has on the economy. Military matters, like removing the anti-war clause from Japan’s constitution, remain on the agenda, likely distracting focus from the economy after the election. Just as they have since he took office two years ago.
|By Lorenzo Totaro, Bloomberg, 12/12/2014|
MarketMinder's View: Would Italy benefit from the current government sticking around and passing economic reforms? Probably. (Depending how they’re written, of course.) Is it necessary for the eurozone overall to stay on its shaky positive course? Nah. They’ve all come this far even with Italy and Greece tottering, and markets have long since become used to political brinksmanship and shakeup in the eurozone periphery. This government going and another one coming would just continue Italy’s status quo of the last four years. Great? No. Ok for Europe and the world? Probably.
|By Damian Paletta, The Wall Street Journal, 12/12/2014|
MarketMinder's View: Alright folks, please look past all the politics and party association of who’s saying what here, because what’s important here has nothing to do with any of that. Bias blinds, and markets don’t care about ideology. We are merely highlighting this to inform you the US debt ceiling returns on March 15, and politicians are already bickering and threatening a stalemate! It’s baaaaaaaaaaack! As that date approaches, there will likely be lots of grandstanding, warnings about the consequences of delay, rumors of default and maybe some market volatility to go along with it. If that happens, remember this: The debt ceiling has been lifted well over 100 times, brinksmanship is normal, and hitting the debt ceiling doesn’t mean we default. See this, this, this and this for why.
|By Paul Mozur, The New York Times, 12/12/2014|
MarketMinder's View: Oh well. This would have been nice, dropping tariffs on about $1 trillion in gadget sales annually. Markets love that sort of thing! But the absence of a positive isn’t a negative—it’s just the status quo, which serves the world fine. This also isn’t surprising. WTO members have tried and failed for years to hash out a trade deal. When you have dozens of countries with competing self-interests and trade negotiators motivated by domestic politics, you generally don’t get a deal. On the bright side, maybe a few bilateral deals shake out! That’s usually what happens.
|By Tomi Kilgore, MarketWatch, 12/11/2014|
MarketMinder's View: My oh my. Oh my. For a war to exist, don’t the two sides have to, you know, oppose one another? Consider recent history:
Rising oil prices coincided with rising stocks for most of 2002-2007’s bull market.
Rising oil then coincided with falling stocks in early to mid-2008.
Both fell in late 2008.
Both rose from 2009 to early 2011.
Oil was more or less flat from 2011 – 2014. Stocks rose.
Recently, oil is down and stocks are up.
Long term, there is no statistically significant relationship—positive or negative—between stocks and oil. What’s more, using the Shiller PE to illustrate anything about the cycles of stocks versus commodity prices 1) is a misapplication of the Shiller PE and 2) uses a faulty valuation indicator that isn’t cyclically tied—uses 10 years of inflation-adjusted earnings—to explain a cycle. Finally, it is bizarre to label 1966 – 1982 and 2000 – 2012 secular bears when the chart plainly shows stocks rose. Besides, there is no such thing as a secular market move anyway, stocks move in cycles.
|By Tim Clift, MarketWatch, 12/11/2014|
MarketMinder's View: This article correctly dismisses many of the current, widely known, widely discussed fears like ISIS, Ukraine/Russia and Ebola as improbable. However, it grossly misinterprets what does cause a bear market and instead offers up its own list of widely known, widely discussed fears. Yes, it’s more likely the Fed hikes rates than Ebola turns into a global scourge. No, that doesn’t mean it is any more risky, because there is little history suggesting an initial rate hike is so bad. What’s more, this also takes a positive—gridlock—and slaps the “BIG THREAT” label on it. In our view, there are two things that cause bear markets: The bull runs out of steam amid euphoria (2000, tech bubble) or a sudden, sizable shock few expected (2008, FAS 157 and haphazard government actions that followed).
|By Ramesh Ponnuru, Bloomberg, 12/11/2014|
MarketMinder's View: OK, party people. What time is it? Time to set your partisan politics aside, of course! There is a big dose of politics in claiming there is a retirement crisis because the follow up question (to some) is, “How’s the government gonna fix it?!?!?!” We caution against getting sucked into that debate. Dispensing with the partisan aspect, this article shows some major statistical flaws with the assertion there is even a retirement crisis to begin with. “…The survey's measure of retirement income excludes the unscheduled, as-needed withdrawals from IRAs and 401(k)s that are the primary way Americans draw down their accounts. Thus the census figures omit most of the income from such saving methods, an error that becomes ever more important as an ever-larger percentage of Americans uses them. So while the survey seems to show a growing problem, all it really shows is an increasingly large methodological flaw.” Now, we also disagree with the notion Social Security is teetering on the brink, but that’s for another day.
|By Scott Cendrowski, Fortune, 12/11/2014|
MarketMinder's View: So the theory here is China is shifting toward emphasizing “quality” growth (meaning: domestic, service industry-led) over the quantity of growth (booming GDP figures). True! But the article misses a few crucial points—like the fact the world’s second-largest economy growing at a 7%+ clip adds hugely to global GDP, and the slowdown has been engineered for years. This isn’t new news. The three factors to watch cited here—Manufacturing Purchasing Managers’ Indexes (PMIs), GDP targets and the stock market—are a wee bit wide of the mark. PMIs register the breadth of growth, not the magnitude. And! All the references here are to manufacturing PMIs (the broader official and narrower HSBC), despite the fact the very same article informs us throughout that China’s intentionally moving away from being a heavy industry-led economy. Which is…curious? Also, growth targets have been lowered for years. And………the very same article argues lower growth is intentional. Also curious. Third, stocks are a good gauge for future economic activity in open markets like the US—contrary to the odd claim here—but Chinese stocks don’t often do so because of capital controls and strict rules governing investment. It’s a very thin market and results show it. Like 2005’s bear market that occurred while GDP growth was 10%+. What grabbed eyeballs this week was a government policy shift targeting the use of local and corporate debt as collateral for Chinese margin loans. Stocks sold off briefly, grabbing headlines (like this one!). However, this seems mostly like short-term noise you shouldn’t read much into.
|By Joshua M. Brown, Fortune, 12/11/2014|
MarketMinder's View: While interesting, this article commits what we believe is a cardinal sin in investment analysis: The lion’s share of the evidence is anecdotal. What we really wanted was a tally of total outstanding securities-based lending and some historical context—but both are absent. We can’t base beliefs on one person who went to work at one securities dealer in the wake of a big industry shakeup, largely because we can’t evaluate her bias. But let’s also consider the thesis: The implication here is subprime blew up stocks in 2008, which is wrong. It was FAS 157, which you can see in a comparison of loan losses (couple hundred billion) and write downs (trillions). The very securities written down turned a profit for the Fed when removed from FAS 157’s dastardly mark-to-market requirements. But also! If liquid assets secure loans, it’s hard to see how that would be akin to illiquid assets creating a systemic panic when they were required to be valued as if they were liquid. The analogy is weak. Look, if securities lending or margin were surging, that could imply a euphoric market, one ripe for being hit by a big, negative surprise. But there isn’t any real evidence of that at this time.
|By Josh Mitchell, The Wall Street Journal, 12/11/2014|
MarketMinder's View: You can safely chalk all the employment/gas-price talk here up as noise. We mean, sales have been up for years now and unemployment was higher earlier on. Also, as the bar chart plainly shows, gas station sales—which are probably influenced by, you know, oil and gas prices—are a component of retail sales. This report also illustrates the fact you shouldn’t take Black Friday gloom at face value.
|By Andrew Ackerman, The Wall Street Journal, 12/11/2014|
MarketMinder's View: So now it seems certain large mutual funds and asset managers will be subject to both stress tests and bans on using certain derivatives as part of their investment offerings, in an effort to head off the likelihood of a run on a fund causing a panic of some sort. The trouble with this notion is a mutual fund doesn’t pose balance sheet risk to the sponsoring firm, so the likelihood a contagion starts is nearly nil. If a big mutual fund that uses derivatives, let’s make one up—Whimco Total Return—gets hit, the securities it owns will fall in value. But that doesn’t threaten Whimco’s (also imaginary) parent firm, Dallianz. The investors take the hit, which isn’t great but is investment risk, which the SEC is stating it isn’t trying to eliminate. In our view, the US regulatory regime under the SEC has long been disclosure-heavy, and that seems right here—require the funds and managers to disclose that they are more subject to liquidity risk and employ leverage, then let investors decide if they want to risk a fund run. (Which is decidedly not a fun run.)
|By Victoria Stilwell, Bloomberg, 12/11/2014|
MarketMinder's View: Here is a new disclaimer we just cooked up for the Fed: Past wealth movement doesn’t indicate future wealth direction. This, of course, is due to the fact that all these shifts reflect the past performance of various things like stocks, bonds, real estate, cash, other securities and oh so much more. But the past performance of investments—including oh so much more, if it is in a market—isn’t indicative of the future performance of oh so much more. Now, we have never seen a market that actually listed an investible asset and called it, “oh so much more,” but you get our drift anyway: Not predictive. Past. Not useful.
|By John Nyaradi, MarketWatch, 12/11/2014|
MarketMinder's View: Yes! It means the market moved in such a way as to meet certain arbitrarily selected markers, like 2.8% of stocks must have set new 52-week highs and new lows on the NYSE, have been met. Oh wait—does it mean anything about future moves? No.
|By Jenny Anderson, The New York Times, 12/11/2014|
MarketMinder's View: Meeeeeeeeeeeh. We are darn ambivalent about this news, that is for sure. So now, instead of waiting two weeks, you’ll get the Bank of England’s meeting minutes, inflation report and monetary policy decision all on the same day. Which is good in the sense the incessant droning from central bankers may be confined to one day. But bad in the sense that now the media will stress these meetings that much more. That they will release transcripts of meetings is a plus, but since they’ll come at an eight year lag that plus is mostly for historians and scholars, not investors. Anyway, we remind you that whatever the timing, investors are better served watching what central bankers do, not what they say.
|By Virginia Harrison, CNN Money, 12/10/2014|
MarketMinder's View: Those three reasons depend on the following scenario playing out: Three upcoming parliamentary votes fail to elect a president, national elections get called and opposition party Syriza wins—Syriza then decides its political talking points aren’t lies, the EU, IMF and ECB don’t fold and reject Greece’s bailout program, Greece loses access to the market again and then decides, “Heck, the euro isn’t worth it” and bombs out of the Maastricht Treaty, which there is no process in place for. Got all that? Suffice to say, while that’s possible, we find it very unlikely Greek political tumult has larger implications beyond its shores. For one, Syriza isn’t anti-euro—they’re anti-austerity, and more importantly, they’re a political party whose rhetoric can change on a whim. And two, despite the widespread fears of the common currency bloc falling apart during the eurocrisis, the most severe issues were unique to Greece. We’ve seen this Greek tragedy play out before, and it needn’t end badly for the eurozone or the global economy at large. Besides, if the author of this piece is right and step #2 brings a “Greek economic apocalypse,” wouldn’t that entirely eliminate #3—the ability of other nations to use a euro exit as a bargaining chip? Their leverage, when confronted with economic apocalypse, would seem to be nil. For more, see today’s commentary, “The Greek Gambit, Redux.”
|By Ben Protess, The New York Times, 12/10/2014|
MarketMinder's View: The key to reading this article and finding value is stripping out the politicization: Forget the quotes about who should be disgusted over what and why, and who thinks Dodd-Frank is the worst versus the bee’s knees. Frankly, the biggest change considered here—allowing big banks to trade derivatives without moving the units to a non-deposit taking subsidiary—wasn’t the cause of 2008, so the debate over this is really not that relevant. This is basically the solution to the problem of a solution seeking a problem.
|By Walter Updegrave, CNNMoney, 12/10/2014|
MarketMinder's View: We agree with the main thrust of this piece: Your retirement planning shouldn’t revolve around a single number. Too unrealistic, too hard to pinpoint, too many things can change! Ultimately, if you need your portfolio to provide for your later years, you must start by knowing where you are today and where you to get to—your goals and objectives. The former can be used to project expenses and backdoor your way into needed cash flow. Once you have this, your goals (do you want to pass money on or not?) can help you determine how much depletion risk you are comfortable taking, which should point you to a proper cash flow rate across various asset allocations. After drilling into these details, you’ll find no cookie-cutter number can adequately account for your situation, so the sooner you ditch that type of thinking, the better prepared you’ll be to reach your personal objectives. For more, see Chris Wong’s column, “Four Tips for Retirement Investing.”
|By J.D. Harrison, The Washington Post, 12/10/2014|
MarketMinder's View: We’ve long highlighted the limitations of sentiment surveys: They aren’t predictive, they tell you only how respondents feel at a particular moment of time, etc. And this one is no different. However, we did find this piece to be a refreshingly optimistic take on, well, optimism. None of the “highest since 2008 eek look out below!!!” handwringing that accompanied many other indicators in recent months. In our view, warming sentiment is plenty justified and indicative of a maturing bull market—which can run on for a while. For more, see our 12/8/2014 commentary, “Now Hiring: Reasons to Be Optimistic.”
|By Peter Eavis, The New York Times, 12/10/2014|
MarketMinder's View: So the Fed’s proposed rule to make the biggest US banks “safer”—through higher capital requirements—isn’t exactly breaking news. Even though the Fed seeks to enforce stricter standards than the international Basel III norm, the largest US banks already meet the higher mark, and the (literally) one that doesn’t has until 2019 to become compliant. So, this doesn’t seem like much of a headwind. However, we question how effective the Fed’s proposal will be in countering the next financial crisis. Regulators seem to think they’ve crafted a solution (or solutions, as the case actually is) to the issues underlying the 2008 Financial Crisis, yet higher capital requirements wouldn’t have prevented the unintended damage wreaked by accounting rule FAS 157 or the government’s haphazard crisis management.
|By R.A, The Economist, 12/10/2014|
MarketMinder's View: The alleged mistake? Hiking rates even though inflation is below the Fed’s 2% target. The danger: Everyone expects inflation to be lower than expectations, and if everyone thinks that way, it becomes a self-fulfilling prophecy. And if the Fed rushes to raise rates during this low inflation environment, it may create deflation. But this seems pretty misperceived to us. Inflation is always and everywhere a monetary phenomenon—it isn’t a psychological issue, dependent on folks’ expectations. Sure, it would be a mistake if the Fed raised rates while money supply was falling, as was the case in the late 1930s. But with money supply rising alongside a nicely growing economy, the risk of a rate hike choking off the current expansion is low. But also, there is no way to predict whether the Fed will actually hike rates any time soon, so this is really just silly speculation about something that’s likely benign in the first place. Other than that, the thesis here is spot on.
|By William Horobin, The Wall Street Journal, 12/10/2014|
MarketMinder's View: Will the so-called “Macron bill”—named after pro-market economy minister Emmanuel Macron—reinvigorate a stagnant French economy? Even though some of the measures (e.g. loosening restrictions on Sunday business hours) sound positive to most, we’d suggest tempering your glee—the law still must make its way through parliament, and it could get watered or shot down completely. Many of the measures were shot down just last year. Consider the backdrop, too: Socialists aren’t likely to support these measures, and there is little chance the opposition does either, despite the fact they are in line with their platform. That said, while pro-market initiatives would be a boon to France’s economy in the long run, they aren’t necessary for markets to move higher today.
|By Simon Constable, The Wall Street Journal, 12/09/2014|
MarketMinder's View: It’s simple: “The theory says that tough legislation typically is forced through in the first two years of a presidency, when the incumbent is still riding the victory wave.” And stocks tend to dislike that sort of stuff—radical legislation that impacts property rights or the distribution of resources and capital. It creates winners and losers, and prospect theory tells us the losers hate this way more than the winners love it—the net negativity drags on stocks. But the logic for happy returns in years three and four is a wee bit off. It isn’t that Presidents start actually boosting the economy. It’s more that they don’t do much at all. They often moderate, and in their lame-duck years, they are usually hamstrung by gridlock, which stocks love. That’s where we are today! President Obama frontloaded major legislation into years one and two and hasn’t passed much of anything since then. He has also moderated significantly from campaign rhetoric. And there appears to be plenty of gridlock—little chance of Congress passing big, sweeping legislation—which stocks love.
|By Ben Martin, The Telegraph, 12/09/2014|
MarketMinder's View: Not just risks—“tail risks”! In our never-ending quest to rid the financial world of jargon, here is a definition of “tail risk.” Tail Risk [teyl risk] Noun: A huge, unseen (surprising) negative that could trigger deeply negative stock returns. (There is also some mumbo-jumbo about bell curves, which you can read here.) These 10 items aren’t tail risks. They are either long-running, widely discussed negatives folks have fretted fruitlessly for years (Chinese hard landing, eurozone), false fears (ECB won’t do full-blown quantitative easing), hugely unlikely (Japanese hyperinflation) or—bizarrely—potential big positives myopic investors miss. Tail-opportunity cost?
|By Huw Jones, Reuters, 12/09/2014|
MarketMinder's View: Ironically, regulations seem to be the culprit for banks’ reducing their market-making activities. It seems regulators are learning first-hand the law of unintended consequences! Whether or not the rules bend to make market-making less costly for banks, we suspect the impact on market operations will be minimal. Liquidity abhors a vacuum, and market-makers’ services are in high demand. Just as high-frequency traders entered the market-making arena in recent years, so could new, non-bank institutions devoted to dealing and matching orders. Where there are potential profits, there are creative entrepreneurs. Again, regulators could probably fix this! But so could free markets.
|By Ben White, CNBC, 12/09/2014|
MarketMinder's View: Can can can they kick the can can can they kick the can can can they kick the can can? Yes they can! They’ll probably take it down to the wire—minutes to midnight Thursday—since that is the 113th Congress’s MO. Both parties appear set on duct-taping some riders to the continuing resolution to fund the government, and some departments might get funded for a couple months only, but this is all normal. Maybe they do shut down over it! Stranger things have happened! But history shows brinksmanship and shutdowns have little to no long-term market impact.
|By Tom DiChristopher, CNBC, 12/09/2014|
MarketMinder's View: So the cyclically adjusted price-to-earnings ratio (CAPE) is higher than its historical average and at 2007 levels. But CAPE’s structure is flawed— it ignores business cycles and assumes the last 10 years forecast the next 10. It is terrible at predicting cyclical turning points. Normal P/Es at least show sentiment, and current levels are darned near average, implying sentiment isn’t running away. As for all the confidence indexes mentioned here—which you can track for yourself at the Professor’s website—we’d simply point out “valuations confidence” is about where it was in 1996, when we were told CAPE implied “irrational exuberance.” “Crash confidence,” which measures how confident people are that the market won’t crash, is at 1990s levels—and judging from its history seems more influenced by people’s memories of the most recent crash than actual forward-looking conditions. For more, see our 8/21/2014 cover, “Oddly Calculated, Bizarrely Inflation-Adjusted Thing Says Stocks Are Overvalued.”
|By Simon Kennedy, Bloomberg, 12/09/2014|
MarketMinder's View: So this is all factually true. The BoJ and ECB plan to expand their balance sheets next year, while the Fed and BoE will continue buying a few bonds in order to keep their balance sheets at current levels. Buuuuuuuut. None of this is stimulus! Central bank bond buying reduces long-term rates, shrinking the spread between short and long rates, which shrinks banks’ potential profits on lending, which shrinks lending. Hence why broad declines in the quantity of money (measured by M4) accompanied quantitative easing (QE) in the US and UK. That’s the bad news. Here’s the good news: Even if the ECB decides to do full-blown QE (and this is far from given), the volume of new asset purchases globally will likely remain less than the volume of purchases in QE’s heyday, so yield curves should still have relatively less pressure on them.
|By Lawrence Lewitinn, Yahoo Finance, 12/09/2014|
MarketMinder's View: And it might! But using technical analysis to predict when the Dow will hit that round number isn’t very telling. Why? Well, past performance isn’t predictive of future returns—you can’t just extrapolate returns out! Further, round numbers don’t mean all that much—they are just another notch stocks hit as markets continue to climb higher. Also, it’s a broken index, and where it and better broader indexes go next year will depend on the likely economic and political landscapes, and the degree to which broad sentiment appreciates the likely reality. It will have nothing to do with whether stocks need to “blow out steam.” We also don’t know what that means.
|By Jon Hilsenrath, The Wall Street Journal, 12/09/2014|
MarketMinder's View: “Federal Reserve officials are seriously considering an important shift in tone at their policy meeting next week: dropping an assurance that short-term interest rates will stay near zero for a ‘considerable time’ as they look more confidently toward rate increases around the middle of next year.” Ooooooooookkkkkkkk. We’ve heard that one before! Trying to game what sort of marketing spin the Fed will add to its press release—never mind when the Fed will hike rates—is a fruitless exercise. Members of the Fed can voice their opinions—and seriously consider things—but all that is subject to change. As it should be. Central bankers generally do best when they don’t back themselves into a corner. As for the rate hike, whenever it comes? It seems odd to think an economy growing above its postwar-average can’t handle rates somewhere north of zero.
|By Jonathan Clements, The Wall Street Journal, 12/08/2014|
MarketMinder's View: The titular statement here is something we totally agree with. But the article actually seems to spend more time on a misguided search for the magical “safe asset” that will hold up come hell or high water. Specifically, the hell cited is 2008’s financial panic, when most non-Treasury bonds got whacked along with stocks, to varying degrees, and you’re told to use this to determine how safe the investment is. Let’s get this straight: There is no “safe” investment. There are only tradeoffs. You can be assured of little to no volatility if you are 100% in cash. But you risk not earning a sufficient return to reach your goals and you’re exposed to inflation eating away your purchasing power. So, you know, not so safe.
|By Mohamed A. El-Erian, Bloomberg, 12/08/2014|
MarketMinder's View: Here are some questions we pondered while reading this piece: How can you square the notion that there is only “one positive data point” with a record 50 straight months of jobs growth? Why would one presume the Fed cannot hike rates without causing disruptions to an economy that has grown at above the postwar-average clip in four of the last five quarters? Where is the evidence job growth is a fundamental for stocks, on that might “validate high equity prices?” Are equity prices even high, considering forward price-to-earnings ratios on the S&P 500 are barely above average? In our view, the trouble here starts from the stubborn thesis that news during this bull market has been mostly bad. It hasn’t. That’s sentiment, which is completely, entirely normal.
|By Mitsuru Obe, The Wall Street Journal, 12/08/2014|
MarketMinder's View: The most interesting part of the second revision to Japan’s Q3 GDP is that the consensus among analysts was the -1.6% annualized drop would be upwardly revised to -0.5%, based on an expected upward revision to business investment. Reality? Not so much, as GDP fell -1.9% on worse-than-expected business investment and still-weak private consumption. It’s a microcosm of the higher-than-justified expectations we believe are a headwind for Japanese stocks.
|By Anatole Kaletsky, Reuters, 12/08/2014|
MarketMinder's View: This is kind of the ugly mirror image of Peak Oil fears—the fear we’d run out of oil. This is the fear we’ll run out of demand for oil. Yes, if we all stop using oil tomorrow and the Saudis keep churning it out, then oil firms will have proven very unwise to invest billions in discovering new oil. The only trouble with this thesis is there is no real sign that’s happening. Demand is up. Supply is up more, as the chronic underinvestment of the 1980s and 1990s reversed itself. We are fairly confident the free market can handle all of this efficiently, OPEC price controls or no.
|By Bill Harris, CNBC, 12/08/2014|
MarketMinder's View: We are darn ambivalent about this piece. The notion of having others implement behavioral techniques to modify decision making to be more “healthy” (auto-enrollment, encouraging certain choices, yada) is just a wee bit on the big brotherish side for our Free-to-Choose selves. But the flipside is behavioral finance is super useful in analyzing your investment and planning mistakes. The default setting of our caveman brains isn’t to think decades down the road—it’s to think in the here and now, problematic for investors who frequently must think long-term over short. In addition, expecting immediate gratification, being reluctant to change and hating any and all losses, no matter how temporary, can all keep you from reaching your retirement goals 10, 20, 30 (or more) years from now. Train yourself early to think about later.
|By James Titcomb, The Telegraph, 12/08/2014|
MarketMinder's View: It seems the 11-nation eurozone Financial Transactions Tax has stalled yet again. The tax, designed to make banks “pay their fair share” for 2008 and the eurozone crisis, would charge banks a small percentage on every trade. This was originally intended to be EU-wide, then eurozone wide, now just 11 of the 18. But now there is squabbling even among those 11, which may again forestall implementation. Ulitmately, we believe that’s just fine, as this is really a solution in search of a problem, and one that (as the Italian experience referenced herein shows) wouldn’t solve very much.
|By Kirsten Grind, James Sterngold and Juliet Chung, The Wall Street Journal, 12/08/2014|
MarketMinder's View: As this piece points out, new banking regulations may put a crimp in the traditional banking model for some financial institutions. Banks typically use deposits to lend, paying a low interest rate to depositors, earning a higher rate on loans and pocketing the difference. And those deposits have historically been seen as a much more stable means of funding than overnight borrowing. But, in the wake of 2008, regulators fret large deposit flight in a bank run. So, ironically, they aim to decrease deposits from certain institutions, like hedge funds, through risk-weighting them. This basically means banks can’t use deposits from such institutions to underpin lending, so the cost outweighs the benefits of getting these big depositors. Hence, banks charge them now. Which likely decreases this traditionally stable source of funding, and discourages banks from doing their traditional job. Ah, can you smell the unintended consequences?
|By Roger Bootle, The Telegraph, 12/08/2014|
MarketMinder's View: A few minor quibbles aside, this is a solid counterpoint to those who fear the economy has reached a permanent plateau of innovation: “Moreover, there are two good reasons why, far from slowing down, the pace of technological change should increase. First, there is the power of computers and the internet. This makes the research, development and the dissemination of ideas, as well as their effective deployment in the productive process, much easier and quicker.” Innovation often comes from ideas colliding—today, they collide so fast and so often, keeping up is tough. “The pessimists about productivity growth are betting against human ingenuity. That’s not where I’d put my money. I reckon that, for the advanced economies of the world, including the UK, the potential growth of GDP per capital is now higher than ever before.”
|By Morgan Housel, The Wall Street Journal, 12/05/2014|
MarketMinder's View: Just smashing! Read. This. Now. It isn’t quite perfect, as we had to deduct half a point for number seven (stock valuations actually aren’t all that important, as they don’t predict future returns), but we awarded two points for number nine, which is brilliant and funny: “A couple of times per decade, investors forget that recessions happen a couple of times per decade.” The other 14 are timeless nuggets of wisdom and advice, too. We won’t share any more here, because really, go read it. Like now!
|By Matthew Yglesias, Vox, 12/05/2014|
MarketMinder's View: No, it’s the sign of a US economy adding jobs at a healthy clip several months after GDP growth sped above its post-war average years into an expansion. Recovery is something you get when the economy starts growing right after a recession. Recoveries don’t happen when you’re already in expansion—above the prior high and growing—because there is nothing to recover from, because things are cooking. That renders all analysis of whether we get some fiscal and monetary stimulus now rather moot. Stimulus makes sense at the depths of recession, when demand and liquidity need a jumpstart. Stimulus doesn’t make sense during an accelerating expansion, and we will let you take the “jumpstart” metaphor to whatever conclusion you want here, because we are no good at metaphors and would mess it up. Look, all kidding aside, this highlights some fine things about the US economy. Growth! Jobs growth! Wage growth! Wheee! But it’s all largely backward-looking. We’d suggest looking to more forward-looking indicators, like The Conference Board’s Leading Economic Index, to gauge whether growth continues (and that gauge is still high and rising). That, not stimulus and whatever else, is what ultimately matters for stocks (along with the degree to which sentiment appreciates this likely reality).
|By Zain Shauk, Dan Murtaugh and Laura Litvan, Bloomberg, 12/05/2014|
MarketMinder's View: Verrrrrrrry iiiiiiiiinteresting! We can’t handicap what Congress and the White House do over the next two years, so it is impossible to know whether they actually saddle up and lift the rather crude ban on crude oil exports. But if it were to happen, it would be a plus. The ban is an antiquated legacy of the 1970s oil shock, aimed at shoring up domestic supply amid the OPEC embargo. That embargo is over, and US supply is abundant, as evidenced by the consistent gap between the domestic (West Texas Intermediate) and global (Brent Crude) oil price benchmarks. Dropping the export ban would allow global markets to function more efficiently and give US oil firms more customers, and a significant body of research shows it shouldn’t hurt gas prices over the mid to longer term. Heck, some analysis suggests dropping the ban would reduce gas prices here a bit.
|By Allan Sloan, The Washington Post, 12/05/2014|
MarketMinder's View: There is exactly one sensible sentence in this article: “The one thing you shouldn’t do is try to time the market or obsess over day-to-day movements.” (And even that we quibble with, because it’s two things. And there are lots of other things investors shouldn’t do either. Like put all their money in three penny stocks today if they need the whole lot to buy a house tomorrow. But we digress.) As for the rest! None of this captures how bond markets work. A bond’s soundness has nothing to do whether the issuer can print money or coin iPods or whatever to redeem it, because if a country has to monetize the debt, chances are inflation jumps and bonds lose real (inflation-adjusted) value. Also, bond prices move on supply and demand. Right now, there is a heck of a lot of demand for eurozone sovereign debt because the ECB is making banks pay to deposit reserves there. So they’re mostly parking it in sovereign bonds instead. Certain corporate bonds are in short supply. US Treasurys are the biggest, deepest market out there, so the competition to buy them isn’t as tough. Those key little factoids render the argument here null and void, in our view. But yeah, don’t “try time the market or obsess over day-to-day movements.”
|By Jon Hilsenrath, The Wall Street Journal, 12/05/2014|
MarketMinder's View: We rather struggle to see why this jobs report would look especially rate-hikey, since last we checked, the Fed theoretically hikes rates to rein in inflation—which happens to be well-below the target now (1.6% y/y for their preferred gauge, the PCE Price Index). Then again, we struggle to see why a rate-hikey Fed would be bad in an economy with a nicely positively sloped yield curve, growth consistently above the post-war average and accelerating loan growth. Like, we can take it, and history pretty strongly supports our thesis. As for that spooky-sounding “two directions” stuff, so what? Why should monetary policy go one way globally? Aren’t we all better off if policymakers do what’s best for their own country’s economy? We get that they might mess up, because central bankers do that sometimes, and Japan is largely messing up now with all that QQQQQE claptrap. (We added three Qs to “quantitative and qualitative easing for dramatic effect. We increased the Q supply to stimulate E output. Sorry, that’s a bad central banker joke.) But really, potential occasional missteps aside, a world where central banks concentrate on their own country and don’t try to get too cute is a good thing. Not a bad one.
|By Ambrose Evans-Pritchard, The Telegraph, 12/05/2014|
MarketMinder's View: There are two ways to think about this quite entertaining, well-written piece. On the one hand, it’s a fascinating look at the ECB’s internal politics, which shows one reason the ECB may not launch full-fledged, sovereign bond-buying quantitative easing (QE). We mean, some of it might be a bit overwrought, like what we assume is a metaphorical reference to ECB chief Mario Draghi retreating to a “narrow kitchen cabinet” when he can’t take the fighting anymore. And it’s also missing a key point, which is that Draghi has long been the master of saying really big power things and then not doing anything. Like saying he’d do “whatever it takes” to save the euro in 2012, then announcing a bond-buying program he never used. But! An insightful discussion all the same. But on the other hand, the notion of the eurozone getting sucked into a deflationary depression sans QE is sheer fallacy. The quantity of money is rising, and so are prices, even as the ECB idles or whatever you want to call it. QE would probably cause deflation, because it would further flatten the yield curve and discourage bank lending. The broadest money supply measures (M4) in the US and UK fell for long stretches during QE there. We fail to see why it would actually work in euroland, where the yield curve is already darned flat and lending anemic.
|By Editorial Board, The Wall Street Journal, 12/05/2014|
MarketMinder's View: So there are some political things here we’d take with a grain of salt, both domestically and internationally. Unless you’re drinking buddies with the Saudi Oil Minister, you probably can’t know exactly what their motivations are for maintaining output as prices fall. But, all that aside, the central argument here—Peak Oil and its many ideological ancestors and descendants were, are and always will be w-r-o-n-g—is a home run and a winning illustration of what happens when free markets, technology and human creativity collide. Like in the 1970s, when exploration in Alaska and the North Sea helped the West thumb its nose at OPEC’s embargo. And the 1980s and 1990s, when deepwater drilling drastically expanded supply potential. And last decade, when fracking went boom. It’ll happen again, maybe with oil and almost surely with other resources. Why? “The happy ending is that the notion that the world is running out of resources always fails because the ingenuity of entrepreneurs, spurred by necessity and incentive, always exceeds the imagination of doomsayers. So we are learning again, and let’s hope memories will be longer this time.”
|By Matt Levine, Bloomberg, 12/05/2014|
MarketMinder's View: Here is some good (and funny) perspective on why it doesn’t much matter whether or not banks start heeding regulators’ suggested limits on leveraged loans (where banks set up and help fund loans from hedge funds and other shadow banking institutions to companies): “If [banks] stop ignoring the rules, the result may just be to accelerate the movement of leveraged loans from banks to shadow banks, a movement that is already pretty far advanced. That doesn’t seem like all that exciting a development. In theory at least, banks are informed relationship lenders that are better at monitoring their borrowers than CLOs and mutual funds are. And, in theory at least, banks are transparent to and supervised by regulators, in a way that shadow banks are not. Though I guess you can’t put too much stock in that, since in this case the actual banks have been almost as enthusiastic as the shadow banks in ignoring the regulators.” In other words, loans keep happening, (probably) no one blows up. (Metaphorically.)
|By Szu Ping Chan, The Telegraph, 12/05/2014|
MarketMinder's View: Hear, hear for the Chancellor’s astounding scientific achievement! We had no idea he was a genius astrophysicist! All this time we thought he was holed up at Number 11 Downing Street, not CERN! … err … wait, that was a metaphor. Sorry. It actually refers to one think tank’s warning that the tax gimmicks in this year’s Autumn Statement (think pre-Budget announcement of fiscal policy tweaks that may or may not be in the actual Budget next year) won’t offset each other over the long term, requiring the government to lop £55 billion off annual spending by 2020 in order to reach its targets. Eeeeeeeeeeeh. Maaaaaaaaaaaaaaybe? But also, does it matter? The current government’s long-term fiscal targets have always been arbitrary, shifting lines in the sand. There is also an election next May, which could change the main cast and result in radically different long-term goals and priorities. It’s all very far in the future and based on long-term forecasts, which are always and everywhere unreliable figments of imagination and mean-reverting straight-line math. Either way, though, we don’t see much to fear or cheer here. Maybe they just keep on with the “austerity” we’ve seen since 2010: slower-than-planned spending increases that didn’t whack growth. Maybe they make actual cuts, and activity shifts to the private sector. Maybe they continue saving on interest payments by refinancing bonds at lower rates. Maybe they do nothing. After all, the UK isn’t Greece. Debt and debt service costs there are well within historical norms and very far from Greek-like levels.
|By Jonathan Weisman, The New York Times, 12/05/2014|
MarketMinder's View: Could it? Maybe. Will it? Probably not—neither party has an incentive to reach across the aisle, hold hands, sing Kumbaya and pass some bipartisan boondoggles. And for that, rejoice! The wish list here would largely just create winners and losers, which stocks tend not to like. Gridlock might be annoying (like, we theoretically pay these greasy politicians to go to Congress and make laws, not just sit around and bicker), but markets vastly prefer it.
|By Staff, EUbusiness, 12/05/2014|
MarketMinder's View: So this is just talk but all sorts of interesting. Evidently no one really likes former EU Financial Services Commissioner Michel Barnier’s proposal for an EU-wide rule separating banks’ trading operations from their core units (their version of the Volcker Rule and the UK’s Vickers Rule). So his successor, the UK’s Jonathan Hill, wrote a letter indicating they might decide to call the whole thing off next year. That would be a nice win for banks, which would have one less regulatory axe hanging over them—perhaps giving them more freedom to lend. Again, it’s all very speculative (and apparently there is some opposition to Hill’s opposition). But still, potential win!
|By Staff, The Economist, 12/04/2014|
MarketMinder's View: This is a pretty darn sensible take on the fact your sector decisions matter more than individual securities, but “avoiding the worst” and picking winning sectors is a) not easy and b) should usually not be all or nothing. The exceptions to that are smaller sectors, like utilities. But overall, you probably don’t want to entirely shun sectors, even those you expect to underperform. Diversification also means hedging against your being wrong. But also, before you even pick sector weightings, you should probably focus on broader factors affecting the market’s likeliest direction over the medium to longer term. As important as sector, country, size and style decisions are, many studies have shown the mix of stocks, bonds, cash and other securities you use matters much more.
|By Peter Landers, The Wall Street Journal, 12/04/2014|
MarketMinder's View: So it seems—based on the polls—Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) will win the majority of seats in the snap election he recently called. Which is not a surprise at all, so this is far from BREAKING NEWS and more of a thunderous duh. After all, you don’t call elections you aren’t reasonably assured of winning. Heck, the major opposition party—the Democratic Party of Japan—is only fielding 198 candidates, and the Diet has 475 seats. Hence, it’s no surprise the LDP is expected to increase its take from 295 to more than 305 seats. The spoils, barring a radical shift in these numbers, aren’t actually so much a mandate for Abenomics as they are a two-year extension to the LDP’s term (and perhaps Mr. Abe’s).
|By David McHugh, Associated Press, 12/04/2014|
MarketMinder's View: Hey look! Mario Draghi said some more stuff! Annnnnnnnnnnnnnnnnnd none of it sheds any more light on what the ECB may actually do, if they expand quantitative easing (QE). This article homes in on Draghi’s comment that there would be more details and discussion “early next year.” Sure, that gives us a rough timeline for when ECB President Mario Draghi could hit the green light on more stimulus measures (which, in our view, aren't the solution). But also, his timeline hint isn’t that great of a clue—central bankers frequently talk and then talk again later, differently. These statements just aren’t set in stone.
|By Staff, Associated Press, 12/04/2014|
MarketMinder's View: Here’s yet another Ponzi scheme making headlines. And it’s certainly unfortunate for the victims. However, like many schemes, there were some glaring red flags (the Court outlined them here)—like the fraudster taking custody of his clients’ assets and promising steady 10% returns. These are two major signs the investment pro you’re talking to may not be real. For more on this topic, see our 8/15/2014 cover, “Crooks’ Common Threads: Three Red Flags to Watch Out For.”
|By Tom Herman, The Wall Street Journal, 12/04/2014|
MarketMinder's View: While we’d leave the tax planning to you and your CPA, we offer this up as a helpful overview for those who have questions regarding capital-loss deductions.
|By Peter Lazaroff, CFA Institute Blog, 12/04/2014|
MarketMinder's View: While we have some minor data quibbles with this—such as using a 75/25 US vs. Foreign split in one table and not disclosing which “World Ex. US” index is used—we find the good outweighs the bad by so much that it’s worth reading no matter what. “You know your client’s portfolio is properly diversified when there is always a portion of it you hate. Right now, that hateful piece of the equity allocation is global stocks.” This is just spot on.
|By Staff, The Economist, 12/04/2014|
MarketMinder's View: The price of oil is sliding—in turn, spurring much speculation about how that will impact US shale. This article, while not totally off target, doesn’t broach the issue of hedging, which oil companies do expressly to limit exposure to short-term oil price declines. This more greatly mitigates the threat of widespread default among unprofitable energy firms. But also, the breakeven point for many of these producers is still well below current oil prices. Plus, hydraulic fracturing technology and techniques are improving! That means more efficiency and cost saving ahead. But all in all, we agree that if oil prices remain low long enough, production could fall some. It’s just that it isn’t likely to happen tomorrow. For more, see our 12/1/2014 cover, “OPEC Stays Put—Will US Shale Take a Hit?”
|By Josh Zumbrun, The Wall street Journal, 12/04/2014|
MarketMinder's View: So this article is great fun, but it probably has fairly limited market impact. Fairly limited. The Beige Book, the Fed’s big fat roundup of surveys from all across the US, occasionally notes odd factoids (well documented in this article), but this year’s may take the cake. Or pie. “Today, the Beige Book included the claim that ‘Pennsylvania analysts are anticipating that this may be the first year in which a majority of households eat their turkey and pumpkin pie at restaurants rather than at home.’” Call us crazy, but we are darned skeptical of that. The author of this blurb has family and friends in Pennsylvania, and in fact grew up there. If more than half of Pennsylvanians—six million people, give or take—ate out, that would be a sea change. We guess this is one more reason you shouldn’t always take Fed words as gospel.
|By John Melloy, CNBC, 12/04/2014|
MarketMinder's View: The alleged “signal”: High-yield bond prices are decreasing. While high-yield bonds do tend to move similarly to stocks, the correlation isn’t perfect. And no past performance holds the secret sauce for what stocks will do—it’s a market, subject to leadership changes, rotations and irrationality. Which seems to explain part of this. Most high-yield bond issuers are probably smaller firms, and the market has recently favored mega caps, a typical maturing bull market feature that can last years. But also, HYG—the high-yield bond fund used as a proxy here—is nearly 14% Oil and Gas firms and in case you hadn’t heard, oil supply is putting huge pressure on them. The S&P 500 is 7% Oil & Gas. But finally, here is the kicker: Why does it make sense to look only at high-yield bond price movements? We’d suggest that’s a wee bit faulty, considering you probably were attracted by the, you know, high yield? Using total return shows HYG is up. Now this is a flawed indicator, but at a broader level, relying on any one indicator to predict what’s in store for stocks distracts investors from the bigger picture—a picture that points to more bull ahead. Maybe, just maybe, we get some short-term volatility ahead. Always possible! For any or no reason. But trying to predict it in general is a fool’s errand; trying with this “perfect sell signal” is worse.
|By Jonathan Weisman, The New York Times, 12/03/2014|
MarketMinder's View: OK party people: What time is it? Time to set your partisanship aside, as we delve into the fun, fun world of partisan politics and markets! The thesis here is that the lame-duck Congress’s squabbling over passing the tax-cut extenders implies more debt ceiling and other budgetary fighting come 2015, particularly since the Republicans took both chambers of Congress. And it then surmises that this has a big economic impact, because it’s all so crazily uncertain. Folks, let’s be clear: Government uncertainty is when the Fed and Treasury haphazardly and schizophrenically decide which near-identical firms they’ll save and which they won’t, with no clarity or transparency—like in 2008. Politicians fighting over the budget and debt ceiling is an American tradition. Besides, remember the Fiscal Cliff: We went off it (partially) and growth accelerated, which is precisely the opposite of what many of these squabbling-is-economically-bad theories claimed would happen.
|By Ophir Gottlieb, MarketWatch, 12/03/2014|
MarketMinder's View: So the thesis here is recently declining oil prices and a weak Black Friday threaten dividends from less-financially stout Energy and Consumer Discretionary firms, coming to the awesomely obvious and always true conclusion: “Is it possible that dividends will be cut as certain sectors face declining revenue and earnings? Yes.” Anything and everything is possible. North Korean dictator Kim Jong Un could get his hands on a copy of Milton Friedman’s Free to Choose and morph into a laissez-faire libertarian, but we don’t think it’s likely. As to dividends, it seems likely both these factors would have to persist for quite some time to actually have this impact. Energy firms hedge. They are aware prices can fall, and usually use forwards and such to lock in higher prices for on the order of 12 - 24 months. That would mitigate the impact of a short-term drop, which is what we’ve seen lately. For Consumer Discretionary firms, this is just massively overstated. Holiday shopping started far earlier than Black Friday this year, and Black Friday has never been proven to predict the holiday season’s direction. Heck, one might presume falling gas prices would bolster Consumer Discretionary firms, as folks rotate spending from must-have gas to nice-to-have other stuff.
|By Victoria Stilwell, Bloomberg, 12/03/2014|
MarketMinder's View: We’re going to cut right to the chase here and give you the salient data points from this article: ISM’s November US Services gauge rose to 59.3 from October’s 57.1, exceeding all estimates. Forward-looking new orders also rose to 61.4 from October’s 59.1. Earlier this week, US ISM Manufacturing registered 58.7, only slightly lower than October’s 59.0. Eurozone Services PMI did dip some in November, but to 51.1, matching the eurozone Composite reading. All these gauges are above 50, the dividing line between growth and contraction. All the rest of the factoids here—oil’s impact, consumer confidence, unemployment, Cyber Monday, whatever is going on at Cracker Barrel—are noise.
|By Tomi Kilgore, MarketWatch, 12/03/2014|
MarketMinder's View: The Hindenburg Omen has far many more false reads than accurate ones, as we discussed here. And the article indicates that, but then confused us with this suggestion: “But before investors pooh-pooh (sic?) the latest appearance out of hand, they should keep in mind that the indicator with the ominous-sounding name wasn’t designed to predict a crash, only warn that it’s possible.” Sigh. Investing is about probabilities, not possibilities. In the same vein, this analogy is wide of the mark: “[Hindenburg Omen creator Jim Miekka] once likened his indicator to a funnel cloud -- they don’t always become devastating tornadoes, but that doesn’t mean investors shouldn’t take cover.” Fight or flight instincts are useful when the issue is a storm that may mean your death or severe injury. They are not helpful in analyzing markets, and if you ran for shelter every time this omen appeared, you would be poorer for it. Look, it’s possible the Earth is hit by a meteor tomorrow, but we wouldn’t suggest you go out and blow your whole portfolio on a wild night in Vegas tonight as a result.
|By Matthew Yglesias, Vox, 12/03/2014|
MarketMinder's View: We are optimistic about the US economy’s prospects, too! But not because oil is falling. Let’s review point by point.
“Consumer spending will increase.” Except consumer spending on gasoline and other oil products, which will fall in a nearly equal amount. Falling gas prices are about winners and losers.
“The job market will improve.” Not if you work in America’s booming Energy industry. Also, the alleged link between inflation and employment was debunked nearly forty years ago by Milton Friedman. Oh! And the job market has already been improving, with the unemployment rate matching its postwar average now.
“Fuel-efficient car sales will decline.” Winners. Losers. But also! This is basically a protectionist argument that presumes our buying American cars is economically superior to our buying foreign cars. But does America benefit if we weaken Japan’s economy?
“Business profits will increase.” For some. Again, winners. Losers.
“Oil boom areas will slow.” Well, except that most of those places have breakeven prices below current oil prices, so even that may not happen. And, the fact is most oil firms are hedged, so this drop needs to have staying power to affect output at anything other than the margin.
“Most state budgets will improve.” Except for the fact gasoline sales are taxed at both the state and Federal level? Also, most state budgets are in perfectly fine shape.
|By Jeremy Warner, The Telegraph , 12/03/2014|
MarketMinder's View: This is well wide of the mark, in our view, and hinges on five widely known, longstanding fears that haven’t stopped the bull thus far. The five are: Equity markets rising while bond yields and commodities fall, which show faltering demand; Europe’s alleged need for ECB quantitative easing (QE) it won’t get; populist extremism in European politics threaten to splinter the euro, which needs more unity; falling oil threatens “some of the world’s major flashpoints”; lastly, not enough private-sector deleveraging since 2007.
That’s a mouthful, but frankly, it reads like a roundup of frequent headlines. Consider: Commodities have been weak since 2011; QE has been proven to work nowhere, so we don’t think the eurozone needs it; extremist parties have mostly won seats (and relatively few of them) at the European Parliament, an election most voters don’t much mind—and the rise began in 2012-ish; we guess “flashpoints” refers to the Middle East and Russia, which are definitively not new and most likely confined to regional conflicts—wars have historically troubled stocks only when global and large scale. Finally, debt levels didn’t beget 2008—an accounting rule change (FAS 157) combined with haphazard government actions in the US and UK did. Our formal forecast for 2015 isn’t out yet, but these factors are likely too old to count.
|By Tommy Stubbington, The Wall Street Journal , 12/03/2014|
MarketMinder's View: Really next to no market impact from this news—the UK will save roughly $15 million annually in interest at current rates, a tiny sum—but, hey, it’s interesting. Next on Osborne’s list: “Mr. Osborne plans to repay the rest of the U.K.’s perpetual bonds—which total £2.59 billion including the War Loan—some of which date back to as far as the Crimean War and the collapse of the South Sea Company in the early 18th century.” That likely won’t have much market impact either, but it will also be interesting.
|By Staff, Reuters, 12/03/2014|
MarketMinder's View: "The survey therefore implies that global GDP (gross domestic product) will expand at a solid pace over the final quarter as a whole, albeit cooler than during the summer months." While we wouldn’t take a global slowdown or continued growth to the bank just yet—PMIs register breadth of growth, but not the magnitude—in our view, this is another piece of evidence suggesting the global economy isn’t exactly teetering on the brink of disaster.
|By Holman W. Jenkins, Jr., The Wall Street Journal, 12/03/2014|
MarketMinder's View: We entirely agree that the Saudis-want-to-kill-US-shale argument is a media invention, and one that is well wide of the mark. So for the first half of this article, we were nodding along. But then, the thesis bends into discussing the allegedly weak world economy and how that’s to blame for low oil prices, not surging supply. There is no real sign demand for oil is down. Virtually all economic data from major economies outside Japan show growth. There is some other rather speculative stuff in here, particularly about Saudi Arabia’s real motivations—unknowable, in our view—but that isn’t pertinent to investors and is largely irrelevant.
|By Jeffrey Sparshott, The Wall Street Journal, 12/02/2014|
MarketMinder's View: File this one under things that shouldn’t be breaking news: The first rate hike in interest rates will depend on a strengthening labor market and rising inflation. And once these are happening to the Fed’s satisfaction, “There is a process that is being set off when the first step starts.” Unless you thought the Fed set monetary policy by spinning a blindfolded Janet Yellen around three times and having her throw darts at the Fed’s magic interest rate dart-board (and we really would not blame you for this, because sometimes that seems like the only logical explanation for Fed decisions), this is not earth-shattering insight. Anyway, facetiousness aside, we wouldn’t read much into this or any other Fed jawboning. Pardon the tautology, but they’ll hike rates when they hike rates. Fedspeak pocket dictionaries, crystal balls, star charts nor anything else won’t help you predict the timing. It’ll depend on human beings’ interpretations of fluctuating data points. You can’t handicap that. Nor do you really need to: Fed rate hikes aren’t inherently bad for stocks.
|By Kyle Caldwell, The Telegraph, 12/02/2014|
MarketMinder's View: The mistakes laid out here aren’t just made by new investors—even seasoned veterans can find themselves chasing heat or focusing on short-term performance. The key, in our view, is to keep your long-term goals and objectives at the forefront of your decision-making, not get blinded by flashy products, remember investing isn’t a get-rich-quick scheme, and to remove as much emotion as possible. Granted, that is much easier said than done—investing, particularly when markets get bumpy, is no easy task. We’ll all make mistakes, and that’s ok! Mistakes are learning opportunities. They make us better: “The key is not to make the same mistake twice and keep an open mind. Mistakes are part of the learning process and will make you a more successful investor.”
|By Steven Mufson, The Washington Post, 12/02/2014|
MarketMinder's View: While this draws some interesting global takeaways from oil prices’ recent fall, many of the conclusions here are a bit overstated, in our view. Sure, some American consumers may have more discretionary cash due to their savings at the pump, but this isn’t going to propel the US economy to a new level—where consumers spend may change but the amount likely won’t fluctuate much. And the possible risks listed out here—like OPEC fallout or the potential hit to the US’ shale oil boom—aren’t likely to be hugely impactful, at least in the short run. Commodity prices can be volatile, and many US shale oil extractors can remain profitable at even lower oil prices thanks to innovative technological gains (and futures contracts that locked in higher prices over the near term). For some oil-reliant nations like Venezuela and Russia, it is no surprise their one-trick economies are getting slammed because of increased supply, but their struggles aren’t likely to put the global economy’s expansion at risk. Falling oil prices just create winners and losers, and in the world economy, the near-term effect is probably more or less zero sum. Long-term? No doubt firms saving on energy costs get more resources to deploy in innovative endeavors, and this could be a nice structural positive. But it isn’t a cyclical factor over the foreseeable future. For more, see our 12/1/2014 commentary, “OPEC Stays Put—Will US Shale Take a Hit?”
|By R.A.., The Economist, 12/02/2014|
MarketMinder's View: Oooooooooooooooh boy. Why so glum indeed! The world is actually a heck of a lot brighter than this commentary suggests. Eurozone breakup? Even less likely today than it was in 2011, when it held together despite widespread fears a crackup loomed. (And even after, when the bloc was in an 18-month recession.) US economy? Accelerating, thank you very much. Global growth? Still happening. Median household income? An arbitrary statistic and heavily skewed by demographics—a terrible indicator of whether people are overall better or worse off. (And if you slice incomes by age range and account for changes in household formation, it becomes clear people are better off.) So we wouldn’t begrudge anyone who felt compelled to pop a certain Bobby McFerrin tune on the old iPod. Now, as for the Fed-related commentary here, it is not the Fed’s job to “coordinate our expectations so that we all anticipate, and therefore cause to occur, maximum employment and an average inflation rate of 2%.” Economic growth and inflation are not psychological phenomena! They are driven by real, fundamental factors! Chief among them? The quantity of money. THIS is what the Fed is tasked with influencing. Let them stick to their knitting, please.
|By Scott Grannis, Calafia Beach Pundit, 12/02/2014|
MarketMinder's View: While the single data point highlighted here is another piece of evidence confirming the US economy’s sound economic footing—ISM’s November manufacturing survey hit 58.7, well above 50, which demarks growth and contraction—we found this takeaway about oil-inspired deflation fears most illuminating: “Deflation is not a dangerous condition: just ask any consumer how good it feels to have his or her hard-earned dollars buy more. If lower energy prices do create some modest deflation, it will not be the fault of the Fed, it will be the happy result of an abundance of cheap oil.”
|By Sarah Halzack, The Washington Post, 12/01/2014|
MarketMinder's View: No surprise here, considering some deals started in early November, negating the need to drag yourself out of bed at 3 AM the day after Thanksgiving and subject yourself to potential bodily harm. Call it a victory for humanity. This is just a good reminder Black Friday weekend isn’t the entire holiday season, which isn’t the entire year. (And retail sales aren’t consumer spending!) Don’t over-focus on any one short period.
|By Alden Abbott, Truth on the Market, 12/01/2014|
MarketMinder's View: When is free trade not groovy? When it’s cover for tighter regulations and more red tape that make businesses less competitive, likely negating the benefits of more open borders. It appears the US/EU free trade agreement presently under negotiation is heading in this direction. Since most transatlantic trade is largely tariff-free, this trade agreement focuses on administrative and regulatory barriers. An easy, unintrusive fix would be bilateral regulatory recognition—the US accepting goods and services governed under EU standards and vice versa. However, both sides say this is out of the question and are seeking to “harmonize” rules instead. When the EU says “harmonize,” they always mean “synchronize,” which isn’t so great, because they aren’t shooting for the lowest common denominator here: “To make things worse, TTIP raises the possibility that the highly successful U.S. tradition of reliance on private sector-led voluntary consensus standards, as opposed to the EU’s preference for heavy government involvement in standard-setting policies, may be undermined. Any move toward greater direct government influence on U.S. standard setting as part of a TTIP bargain would further undermine the vibrancy, competition, and innovation that have led to the great international success of U.S.-developed technical standards.” Now, none of this is a done deal yet, and the agreement may never see the light of day. But this is a good reminder that even seemingly great policies like free trade are nuanced and can create winners and losers.
|By Staff, Bloomberg, 12/01/2014|
MarketMinder's View: China’s official manufacturing purchasing managers’ index (PMI) fell to 50.3 in November—below expectations for 50.5 and October’s 50.8—but remained above 50, considered the dividing line between expansion and contraction. But as mentioned here, there is a mitigating factor—factories in five provinces were ordered to shut down for two weeks to clear pollution during the Asia-Pacific Economic Cooperation forum. Now, that doesn’t explain the slowdown away—new orders slowed more than production—but it does reiterate how no single month is terribly telling. Beyond that little lesson, we’d merely note China’s PMI has hovered between 50.2 and 51.7 for the past 12 months, and this ostensibly anemic reading hasn’t translated to anemic growth.
|By Matt Clinch, CNBC, 12/01/2014|
MarketMinder's View: The bearish indicator here is weekly exchange-traded fund (ETF) inflows, which apparently surged to late-2007 levels. We say apparently, because this is one firm’s proprietary report, and reliable publicly available ETF data begin in 2010. That aside, we find it quite hasty to say rising ETF inflows are a sign of euphoria and a bull market peak. One, sentiment wasn’t euphoric when the last bull market ended—it was truncated prematurely as markets were forced to price in the deleterious impact of FAS 157 (mark-to-market accounting) on bank balance sheets after it was misapplied to thinly traded illiquid assets. Two, there are rational, administrative reasons for investors to load up on ETFs now—like avoiding the wash sale rule after harvesting tax losses. Many firms and individuals use ETFs for this, and ‘tis the season. Three, other indicators of sentiment like valuations and headlines are quite tame.
|By Trish Regan, USA Today, 12/01/2014|
MarketMinder's View: Translated, the Fed is determined to keep rates low until wages rise, giving stocks plenty more “easy money” mojo—which we’re simultaneously told is good (bull market) and bad (it’s a bubble). Errrr…no. To the first, history shows rate hikes aren’t bearish. To the second, when earnings and revenues are at all-time highs and rising, it seems rather odd to say stocks have no fundamental support. They have plenty! Most folks just don’t see it. The world is way stronger than this piece gives it credit for.
|By James Titcomb, The Telegraph, 12/01/2014|
MarketMinder's View: A sensible decision, in our view. The proposed rules, which would have required Switzerland’s central bank to repatriate all gold held abroad, buy more than 1,700 tons of gold by 2019 and never sell another gold bar again ever, would have severely crippled Swiss monetary policy. We’ve said it before and will say it again: Central banks generally operate best when free of political intervention, whether in the form of populist mandates like this referendum or direct government influence.
|By Staff, Xinhua, 12/01/2014|
MarketMinder's View: Hooray, China is about to get its own People’s FDIC. We will set aside the debate over whether deposit insurance is good (helps shore up confidence and limit bank runs) or bad (moral hazard). This is a key step forward for Chinese reform, and not just because it might level the playing field a wee bit between big and small banks. Rather, regulators have long said they can’t liberalize bank deposit interest rates until deposit insurance is in place. Now they’re getting close, which means China should be that much closer to market-driven interest rates. Good news for the many savers who have been forced to accept artificially low yields on savings.
|By John Biers, Yahoo! Finance, 11/28/2014|
MarketMinder's View: Yes, it does seem that OPEC—particularly Saudi Arabia—is a-ok with lower prices in an effort to retain market share. But it remains to be seen if this will come at the expense of shale producers or other producers more reliant on higher costs, some of which are in OPEC. Venezuela, for one, is in a pinch with prices falling far. Meanwhile, increased efficiency in shale has driven the breakeven price for some major US shale fields—like North Dakota’s Bakken—to about $45 per barrel, according to the US Energy Information Administration. And presently low prices are likely to have to show some real staying power to force existing production offline. This probably affects US (and other nations’) production growth, but we think it’s premature to call it a watershed moment. The best aspect of this story? It makes it crystal clear this issue is about fast supply growth—not weak demand.
|By Neil Irwin, The New York Times, 11/28/2014|
MarketMinder's View: This is a good discussion of some statistical reasons not to buy into the “crucial holiday shopping season” rhetoric. “In other words, the gap between what holiday sales will be this season in the best and worst cases is a mere $67 billion. That’s all of about 0.4 percent of our $17.6 trillion economy.” While we wouldn’t necessarily calculate the gap between the worst non-recessionary year’s sales and compare it to the best to come up with the range, that range is illustrative of the historical tendency to overstate the importance of holiday shopping to the economy. Look, good tidings and all, but holiday gifts won’t create a boom or a bust. (Besides, retail sales don’t fully capture services spending. Which is big.)
|By Alessandro Speciale, Bloomberg, 11/28/2014|
MarketMinder's View: Yes, November's flash eurozone consumer price index reading showed inflation slowed to 0.3% y/y. And maybe, just maybe, this will drive ECB head Mario Draghi to expand quantitative easing (QE). But he shouldn’t. There is no evidence QE will boost inflation. It didn’t in Japan from 2001 – 2006, or the US and UK when they were engaged in QE. Japan today has the largest QE program as a percent of GDP and 0.4% core inflation (after removing the impact of the sales tax). Finally, there is zero evidence low inflation is a problem. In fact, deflation has really only been known to be an issue when it is sharp and deep, and even then those issues are more related to the financial panics or central bank errors that caused the deflation. This is particularly true when that low inflation is being dragged down by energy--eurozone core inflation was steady at 0.7% in November.
|By Ambrose Evans-Pritchard, The Telegraph, 11/28/2014|
MarketMinder's View: The thesis here? Stimulus from the ECB, BOJ and People’s Bank of China won’t be enough to offset the liquidity squeeze now that the US has ended quantitative easing (QE)—and that’s even before hiking rates allegedly squeezes credit further. But this all assumes QE has been stimulus, pumping massive amounts of liquidity into the global economy in the first place. To the contrary, there is little evidence it has done any such thing. Consider: The falling commodity prices cited here? That began before QE3 was even announced, in late 2011. Select Emerging Markets’ weakness? Ditto! What has happened is the two major economies who had QE and now ended it—the US and UK—both accelerated after it was over, with loan growth finally picking up. There is much more evidence—and a century of theory—that argues QE was wrongheaded, deflationary policy than inflationary. So to the extent Japan’s QQE and the ECB’s quasi-QE don’t offset the Fed taper, we’d say that’s bullish. China’s rate cut is a horse of a different feather. It is largely ineffectual, but mostly because China’s communist—the party mandates lending quotas.
|By Paul Kiernan and Rogerio Jalmayer, The Wall Street Journal, 11/28/2014|
MarketMinder's View: So Brazil’s technical recession (two quarters of contracting GDP) is now over since Q3 GDP eked out a positive +0.1% q/q print. But there are still significant headwinds remaining, like the fact consumer spending fell. This is also an economy underpinned by the Energy and Materials sectors, which both are dealing with sharply declining commodity prices. Just some things to weigh before you samba over the infectious beat of Brazil’s economy.
|By Scott Grannis, Calafia Beach Pundit Blog, 11/28/2014|
MarketMinder's View: “According to the GDP stats released yesterday, third quarter after-tax corporate profits hit a new nominal high of $1.87 trillion, and a new high relative to GDP of 10.3%.” Wheeeeeeeeeeeeeeeee! Now, this is the Bureau of Economic Analysis’ data, which includes private and public companies. But you can see similarly positive growth in purely public firms too: According to FactSet, with five companies still to report, Q3 S&P 500 earnings and revenue are expected to log 8.0% y/y and 4.0% growth, respectively.
|By Neil Irwin, The New York Times, 11/28/2014|
MarketMinder's View: Those trends are: 1) Cheaper gas and fuel 2) Job growth 3) Americans becoming more confident in the economy 4) Home prices rising at “sustainable rates” and 5) Americans seemingly taking on less debt. So cheaper gas and oil prices can be a plus for some folks, but they are a drag for others, largely offsetting. The real plus in that story is why oil prices are down, which is because supply growth has been surging against a backdrop of positive-but-slower demand growth. The labor market is a late-lagging indicator; confidence gauges are coincident and often aren’t telling of behavior; past home price movement isn’t indicative of future movements, as this article unwittingly illustrates. The last point—that Americans aren’t deleveraging—is a plus, but oddly perceived. It’s really more about how much banks are willing to lend, which is a factor that has improved with the Fed’s tapering—and is a forward-looking plus with QE over. We guess these are still five (of many) pieces of evidence the economy has been doing better than folks thought. We would merely like to point out a few better gauges of where the economy is going: A rising Conference Board US Leading Economic Index, stock prices and corporate profits; healthy corporate balance sheets that are flush with cash; increased lending. We could keep going, but we trust you get the point.
|By Karen Damato, The Wall Street Journal, 11/28/2014|
MarketMinder's View: Well, this is a fun little read with only a couple minor quibbles. In our view, target-date funds (recommended near the end) near totally misperceive investment time horizon, as they tend to hinge on retirement date. But that aside, the rest is grand—particularly the behavioral finance discussion. For more things to be thankful for, see our 11/27/2014 commentary, “Thankful the World Over.”
|By Raymond Zhong, The Wall Street Journal, 11/28/2014|
MarketMinder's View: In our view, this is a pretty dour take on some relatively positive news. Sure, India slowed a bit from Q2, but only by -0.4 percentage point. It also beat expectations and 5.3% y/y growth is nothing to shake an angry fist at. As for the reform discussions, we think Modi has actually been doing a fairly good job thus far in his first six months. But also, reforms won’t immediately translate to gains in GDP growth rates. Mostly, that dour takes like this continue to pop up suggest skepticism remains—and the euphoria we typically see near bull market peaks is still absent.
|By Allan S. Roth, The Wall Street Journal, 11/26/2014|
MarketMinder's View: Some good, some less good here. We’ll start with the less good, because we feel like being Grinchy today: Rebalancing is quite often synonymous with market timing, unless you have a very rigid schedule you stick to. Too many folks think rebalancing means, “This category did really well, so I should sell some of it and plug the proceeds into this other thing.” Which is all a backward-looking, performance-only based decision that doesn’t account for the fact category outperformance can persist for long, long periods. In our view, your foreign versus domestic allocation should really reflect your outlook for various regions. Now then, the non-Grinchy stuff: “The diversification argument is simple. Living in a global economy as we do, I wouldn’t consider limiting my stock buying to only my home state or country, and neither should you. In fact, I’d diversify into interstellar stock markets if I could. The argument that we get enough international exposure by owning U.S. stocks which do business overseas is flawed, and gets me to my second argument, market timing.”
|By Paul Vigna, The Wall Street Journal, 11/26/2014|
MarketMinder's View: Well, maybe it is and maybe it isn’t. However, we feel compelled to point out the obsession over Black Friday and Cyber Monday as indicators of how retail sales will go is amazingly overdone. Public service message: Black Friday and Cyber Monday aren’t meaningful for investors—too myopic—and they aren’t indicative of which way holiday spending goes in total. Which itself is awfully myopic for longer-term investors to consider heavily.
|By Alan Kohler, The Australian, 11/26/2014|
MarketMinder's View: Well, not really. It’s causing low inflation. This article is a totally mixed bag, but it does highlight one common confusion around deflation: the notion it is always bad. It isn’t. Deflation that occurs as a result of a bank panic or monetary policy error probably is (though it usually follows the onset of those factors). Deflation that occurs because of a production surge (a la the industrial revolution) is not at all bad. Today, we have some modestly deflationary monetary policy (not hugely so) in quantitative easing (QE), which discourages lending through flattening the yield curve. But arguably a bigger factor is the massive increase in commodity production, which has flattened prices for oil, iron ore, copper and more. But again, we don’t have deflation today, and with the US ending QE, one major deflationary pressure has been alleviated.
|By Angela Monaghan, The Guardian, 11/26/2014|
MarketMinder's View: For those of you who don’t follow econo-talk closely, here is what’s up: After the crisis, the policymaking “elite” in Britain decided the economy’s problem was it was too reliant on the consumer to sustainably grow. So instead, they promoted a bunch of policy positions and talked about targeting increased exports and business investment, to supposedly put the UK economy on more solid footing. Now, nevermind that UK GDP growth has been among the fastest in the developed world for about two years now, underpinned largely by consumer spending. Instead, consider the general operating thesis here: That exports and business investment, two very volatile economic metrics, are more “sustainable” than consumer spending, which is stable by contrast. Suffice it to say, the logic of this plan has never been exactly clear to us. But also, business investment’s 0.7% dip follows a string of fairly positive quarters, and exports have been weak throughout the UK’s expansion. So we don’t really think this is so unsustainable after all.
|By Michael Santoli, Yahoo! Finance, 11/26/2014|
MarketMinder's View: So the thesis here is that too many market participants are operating on the same, two-pronged theory, so any questioning of that theory results in volatility. The two prongs are 1) slow-but-steady economic growth will continue and 2) central banks will rush to the rescue if there is any sign it won’t. In October’s case, we are told here that the volatility was related to weak eurozone data and a tepid reaction from the ECB. But, umm, that’s like the norm since 2009. The eurozone was in recession for 18 months with higher overnight rates than the US had while it was growing. The bull market continued throughout. Moreover, the notion that central banks have to rescue all of us is actually just backwards. Quantitative easing is a negative, flattening the yield curve, reducing banks’ loan profits. As a result, it isn’t surprising that loan growth was slow before the taper—faster since the taper began. As to the notion a Fed president’s comments may have turned the tide in mid-October, that’s actually evidence the whole episode was merely a correction. Consider: James Bullard, the St. Louis Fed president, doesn’t have a vote on policy at present. His comment alluded to delaying tapering the final $15 billion of monthly bond buying—a tiny amount relative to supply—by one month. Corrections are short, sharp, sentiment-driven moves that start for any reason or no reason, at any time. Their end is equally illogical, which pretty much describes the theory claiming James Bullard is the market’s savior. In our view, October’s market move has all the hallmarks of being a correction, except that it didn’t technically reach the -10% down threshold.
|By James Politi, Financial Times, 11/26/2014|
MarketMinder's View: So a lot remains to happen here before this is enacted, but the plan aims to eliminate the ability of judges to force firms to rehire terminated or laid-off workers. There would still be seniority issues, as workers would receive increased protections based on tenure. It isn’t a huge step for Italy, but a step in the right direction.
|By Joshua M. Brown, The Reformed Broker , 11/26/2014|
MarketMinder's View: Yep, if you sold at an earlier all-time high, these are not the most fun times for you, as the market has strung together a slew of all-time highs recently. If this bull plays out as they typically do, there will come a time when similar market movement will indicate euphoria. At peaks, folks eschewing fundamentals and capitulating based on past returns and the pain of missing out is common. However, that time isn’t today, in our view. As to the data regarding the S&P being persistently above its five-day moving average, that’s not actually indicative of herding behavior, which one would generally associate with bubbles. Want some evidence? Here goes: The table included herein displaying the top nine (also oddly arbitrary) periods in which the S&P consecutively closed above its five-day average. In only one—March 1956’s—did a bear market begin in the subsequent 12 months.
|By Steve Goldstein, MarketWatch, 11/26/2014|
MarketMinder's View: The data here are fine, the interpretation is a wee bit wide of the mark, in our view. For one, that US GDP grew 3.9% in Q3 after Tuesday’s revision doesn’t suggest we have “momentum” which is not a thing economically. (And if we have “momentum,” what’s up with the dour tone in the second half of this article? But we digress.) While it is possible the US economy slows in Q4, the data here aren’t nearly clear enough to know that yet. Jobless claims are more indicative of past conditions than current. Consumer confidence doesn’t indicate consumer behavior. Capital goods orders frequently dip and dive, without indicating very much about our service-sector driven economy. And housing is a teensy slice of the US economy, so whether mortgage rates stay low or not isn’t as relevant as it is made out to be here. But hey, let’s say the economy does slow down. Consider: Stocks don’t need a torrid economy to rise significantly, Exhibit A being the current bull market. What they need is a growing global economy, which seems to be the case today. Finally, with The Conference Board’s Leading Economic Index rising, we’d suggest growth in the US is poised to continue.
|By Jonathan Weisman, The New York Times, 11/26/2014|
MarketMinder's View: Whether it happens in the lame-duck session or shortly thereafter, it is highly likely most of the tax breaks alluded to here are retroactively reinstated. This is what Congress does. This is also what the President does to try to send a message to the incoming Congress, in which the Republicans hold both chambers. Don’t get caught up in the theatrics in DC.
|By Josh Mitchell and Jeffrey Sparshott, The Wall Street Journal, 11/26/2014|
MarketMinder's View: We’re not going to get all “guns-and-butter” on you here and suggest that ISIS is stimulating the US economy as evidenced by the 45.3% m/m increase in defense aircraft spending. Rather, we’d simply suggest putting the reported -0.9% dip in nondefense capital goods spending in a broader context, like this one: “The broader trend suggests demand for long-lasting goods continues to rise as more Americans gain jobs and firms gain confidence to invest. So far this year, orders for durable goods have risen 7.5% compared with 2013. Orders for nondefense capital goods excluding aircraft have climbed 5.4%.” There is a lot of chop in this series, as this chart shows.
|By Leika Kihara and Stanley White, Reuters, 11/25/2014|
MarketMinder's View: Hey! Breaking news! Japan wants to avoid deflation. But we would suggest the evidence continues to mount that quantitative and qualitative easing (QQE) isn’t a solution. Thus far QQE hasn’t really helped on that front (and it has also been a drag on broad money supply growth). Sure, CPI has ticked up, but that has been largely a function of pricier imports (natural gas and other Energy sources). Removing energy and April’s consumption tax from the equation, inflation remains pretty lackluster. Further, as a byproduct of QQE—the yen has weakened. But that isn’t a net benefit for Japan because it makes imports expensive—taking a toll on businesses and people. (Which the government even acknowledges now.) In our view, adding another Q to QQE would be a questionable move indeed. In related news, it seems BoJ head Haruhiko Kuroda is attempting to start a wage-price spiral (up, we mean) with himself.
|By Brent Kendall, The Wall Street Journal, 11/25/2014|
MarketMinder's View: So this is interesting in the sense that the rules in question were those targeting coal-fired utilities, which some have hyperbolically labeled a “war” on a carbon-based inanimate object which the US is considered the Saudi Arabia of. Whichever way the court rules, though, we would suggest the coal industry faces headwinds unrelated to the EPA. Namely, natural gas, which is super cheap, super plentiful and emits less carbon. In fact, these rules are actually pretty toothless, when you consider the free market has already been trending this way at a faster clip than mandated by the EPA. But, you know, who’s counting?
|By Matt Levine, Bloomberg, 11/25/2014|
MarketMinder's View: A solid article on why you should take sell-side analysts’ buy or sell recommendations with a grain of salt: “An investment bank is primarily an intermediary. To make its money, it needs to convince some people to buy a security, and other people to sell the same security. How can it mean it both ways? The more sincerely and adamantly it believes that people should buy a particular security, the less plausible is its simultaneous belief that other people should sell it.” An inherent conflict of interest exists—it is vital that investors do their own research or hire someone to do it for them, rather than blindly relying on such conflicted recommendations. That was the lesson of the tech bubble, and it’s the same lesson today.
|By Staff, Reuters, 11/25/2014|
MarketMinder's View: Q3 US GDP was revised up from the first estimate—rising at seasonally adjusted annual rate of 3.9% instead of 3.5%, led by consumer spending and business investment. Yippee! But we’d like to remind investors that this figure is subject to more revisions down the road (up or down). And it is still backward-looking. Read: Stocks have already moved on this data. We mean, if you still needed confirmation US economic growth has picked up from this expansion’s historically slow earlier years, here you go. But if you read this website frequently, that’s old news to you.
|By Saabira Chaudhuri and Ryan Tracy, The Wall Street Journal, 11/25/2014|
MarketMinder's View: “The figures [a 4.8% rise in revenues] highlight an increasing willingness to lend on the part of U.S. financial institutions. Loans outstanding rose 4.6% from a year earlier, reflecting broad-based growth in loans to businesses and consumers. Growth was stronger at small banks, generally those with $1 billion in assets or less, increasing 8%.” Also interesting is the graph showing the sharp rise banks’ holdings of US Treasurys, which may partly explain the fall in long rates this year.
|By Allister Heath, The Telegraph, 11/25/2014|
MarketMinder's View: Here are two interesting factoids we find telling: In the US and UK, 76% and 75% of millionaires are self-made. This is not the hereditary wealth of medieval times, and that’s for the best: “It’s pretty simple: a country cannot be successful if its citizens themselves are not rewarded for generating economic growth and creating jobs.”
|By Simon Kennedy, Bloomberg, 11/25/2014|
MarketMinder's View: Wheeeee! More central bank noise for investors may be coming if the ECB starts releasing its meeting minutes, a la the Fed and BoE. But this is more a nuisance than desirable transparency from a central bank, because at the end of the day it’s all just words, words, words. And those words are subject to change.
|By Andrew Lilico, The Telegraph, 11/25/2014|
MarketMinder's View: We agree. The global economy isn’t a fixed pie. As the article sensibly points out, “Much economic growth comes from finding ways to do things we value now but couldn't do in the past. There is no automatic link between rising value and resource scarcity. Second, the faster we deplete resources, the more efficient we become in using what's left. … Third, and most fundamentally, our resources are not confined to what we can find on Earth.”
|By Nick McDonald, The New Zealand Herald, 11/24/2014|
MarketMinder's View: At a high level, we agree with some of the points made here: Many perma-bears have called 42 out of the last two bear markets and 67 of the last five recessions. So take them with a grain of salt. But, that doesn’t mean you should “go with the flow and trade with the market momentum.” That amounts to assuming recent past performance will carry forward—the trend is your friend, so to speak. Follow that logic, and you’ll easily get fooled in and out of stocks repeatedly by markets’ short-term wobbles. Also! This type of article is a relative rarity today, but they are a typical feature of bull market peaks. When making fun of bears becomes a common pastime, the market may be setting you up for a dose of humility.
|By Paul Taylor, Reuters, 11/24/2014|
MarketMinder's View: It’s Europe’s Final Countdown! Just kidding, it’s nothing that dramatic or cool. Rather, the countdown is to an EU meeting in mid-December, where leaders will discuss how to address long-standing issues the Continent has faced for years—particularly in the eurozone. They likely won’t come up with anything substantive, but that’s not as big a negative as portrayed here. Hard as it may be to believe, the eurozone has been sputtering along—it is by no means the global economy’s growth engine, but it also isn’t the dead weight many are making it out to be. Revisiting old ghosts is just a different way to spin false fears—a sign dour sentiment still persists.
|By Liam Halligan, The Telegraph, 11/24/2014|
MarketMinder's View: Why? Because it’s ginormous, and investors will see ginormous QE, think the world economy is on its last legs, and panic. This is far-fetched. We aren’t really sure what else to say about something so entirely speculative and not at all supported by recent history.
|By Buttonwood, The Economist, 11/24/2014|
MarketMinder's View: But if you try sometimes, then you might find you get pension reforms that allow you better choices than annuities no matter what some surveys say. (Sorry, Mick.) Financial freedom, children, it’s just a law away. (Sorry, Mick.) Here is the tough truth: If you seek capital preservation and growth, you won’t get no satisfaction. You can’t! Even with an inflation-linked annuity. Anything telling you otherwise is marketing spin at best. Which this article largely acknowledges. But none of this means the pension reforms are a “dangerous illusion.” If wild horses couldn’t drag you away from an annuity, you can still buy one. If you want an emotional rescue from overly rigid retirement rules, you get one. Stocks’ short-term wobbles might not come with the mental security blanket of an annuity guarantee, but if you have a long time horizon and want to grow your portfolio, time is on your side.
|By A. Gary Shilling, Bloomberg, 11/24/2014|
MarketMinder's View: We so hoped this article would be a five-word piece saying simply, “Because they don’t understand economics.” Alas. In theory, countries deliberately weaken their currency in order to make exports cheaper abroad, goosing growth. In reality, what usually happens is one country weakens their currencies, pundits go nuts with the “Danger, Will Robinson, danger! Currency wars incoming!” and then nothing actually happens. That’s what is happening this time. There is no currency war. Japan weakened its yen to boost exports. Everyone thought Korea and Taiwan would follow suit. They didn’t, and they exported plenty. Japan, meanwhile, did not enter export-led growth heaven. Exports rose in yen, but not in quantity terms, so output wasn’t goosed. Households and businesses were hamstrung by rising import (particularly energy) costs. All are in line with observable history: There is no demonstrable link between currency strength/weakness and exports. Oh, and as for the eurozone, their goal is more to increase the quantity of money, not explicitly target a weaker euro.
|By Jeff Sommer, The New York Times, 11/24/2014|
MarketMinder's View: Though a bunch of historical figures and quotes are tossed around here, just a single counterpoint is offered against the bullishness of government gridlock: Since 1901, the Dow’s annualized return during gridlocked years (4.06%) was slightly less than both the annualized average of all years (6.27%) and years without gridlock (7.88%). So, “based on those numbers, gridlock has been a hindrance for the stock market.” That sweeping conclusion seems a wee bit myopic to us, especially given the Dow’s limitations and market data’s questionable quality in the early 20th century. Verified S&P 500 data paint a somewhat different picture. Since 1926, stocks have a higher frequency of positive annual returns when the President doesn’t control Congress (75.6%) than when he does (70.2%). Average annual returns are a bit lower during gridlock (10.4% vs. 13.3%), but then again, this isn’t about pitting one against the other. It’s about shattering the widely held view that a do-nothing Congress is a negative. The higher frequency of positive returns, coupled with nicely positive average returns, would strongly suggest gridlock is a positive, not a negative. For more, see our 11/6/2014 commentary, “Goldilocks Gridlock.”
|By David Nakamura, The Washington Post, 11/21/2014|
MarketMinder's View: Whether you believe President Obama’s executive order on immigration is the cat’s meow, the worst or somewhere in between, it is a purely sociological thing. It does not alter cyclical economic factors and has no fundamental impact on markets. Markets don’t care about sociology. People care! But markets don’t. (Though, if this move brings more gridlock, markets would like that.)
|By Jason Zweig, The Wall Street Journal, 11/21/2014|
MarketMinder's View: We are pretty darned ambivalent on this piece. On the one hand, yes! Diversify globally! Foreign stocks have taken it on the chin lately, but overall and on average, going global helps broaden your opportunities and manage risk. Chasing heat with a US-only portfolio purely because of recent performance is likely the wrong move. But, on the other hand, the reasons to buy foreign should not include hedging against a US rate hike (something history shows has no history of bearishness). Nor should they include sky-high valuations in the US. Partly because the sky-high valuation here is the wonky 10-year smoothed P/E ratio, which is even less predictive than normal P/Es, and partly because P/Es don’t show you anything but sentiment. The current one-year P/E is right around average, which suggests sentiment hasn’t run away from reality. Again, the reasons to keep some money in foreign now are because heat chasing is bad, and sentiment on foreign stocks is just too dour.
|By David Jolly, The New York Times, 11/21/2014|
MarketMinder's View: Worried about the Japanification of Europe? Well here comes Jedi Master Mario Draghi with another mind trick over the euroland economy and capital markets! Wheeeeeee! Kidding. Actually, we hope this one goes kinda like the last time Super Mario tried to use the Force: He said some words and then announced a program that he never used. Because actually doing something this time would probably mean massive quantitative easing, and that would be bad. It would flatten the yield curve further, whacking lending and boosting bank reserves—which banks must pay to hold at central banks. To get around that, they’ve been charging customers for deposits. So let’s add it up: They’ll lend less and suck money out of the system via deposit fees. That’s DE-flationary, folks! A one-way ticket to the Dark Side. This isn’t the stimulus you’re looking for.
|By Andrew Spicer, The Guardian, 11/21/2014|
MarketMinder's View: Hear ye, hear ye! Bankers are people! Not aliens! Not robots! (We think. But we’re open to the idea of bankerbot.) There. Ethical problem solved. Errrrr…or not. All kidding aside, the notion banking is inherently morally bankrupt is quite wide of the mark. Are there some liars and crooks? Of course. But show us a profession where that isn’t true! To paraphrase legendary investor Lucien Hooper, all professions have “incompetents, crooks and charlatans.” The study here proclaims to show otherwise, but its shortcomings seem fairly obvious—the sample is limited and the methodology bizarre. We aren’t scientists or psychologists, but we are unconvinced any of this is a thing. So that raises the question: Why focus on bankers? Why not make dozens of onerous rule changes in a vain attempt to stamp out criminal activity in all professions? Ooooooh. That’s right. 2008. Anyway, this is a sentiment-driven witch hunt, nothing more. The banking industry is no more prone to greed-driven criminal behavior, and the occasional disruption as a result, than any other. It is no riskier and no more in need of a clean-up. And we suspect our financial system would function more efficiently without all this scrutiny impeding banks’ ability to do their societally beneficial job of channeling savings into investment.
|By Jeremy Warner, The Telegraph, 11/21/2014|
MarketMinder's View: This might be a wee bit optimistic, considering a more realistic timeframe for Chinese liberalization is probably more like 30 years, assuming that remains a priority in future administrations, but philosophically, it’s on target. The entire world would benefit from a more open China with freer trade and freer investment—capital would be allocated more efficiently globally. A win for everyone! Folks often fear China’s ascent, but the implications are vastly positive. (Though, the “and if they don’t” scenario posited at the end is rather too dour, in our view.)
|By Lingling Wei, The Wall Street Journal, 11/21/2014|
MarketMinder's View: Rate cuts aren’t totally magical in China, where the government ultimately controls the quantity of money through loan quotas. But it’s a noteworthy sign of verbal support and might goose sentiment some. Actually, what we find most interesting is the decision to widen the bandwidth between deposit and loan rates—another step toward financial liberalization, which will benefit China far more over time than a dinky rate cut.
|By Mohamed A. El-Erian, Bloomberg, 11/21/2014|
MarketMinder's View: We will happily concede that markets tend to rally when central banks announce big stimulus, because it is factually true. Who knew! That said, there is a yawning gap between a short burst and a sustained, sentiment-driven rally of bubblicious proportions. We haven’t seen that anywhere quantitative easing (QE) or massive monetary loosening was tried. Did stocks rise? Yah, but that’s sort of what happens during a bucking bull market, which manage to run on for over five and a half years even though the US and UK flattened the global yield curve with their QE programs. Companies just found other ways to get financing to boost capex and earnings potential. Yay, capitalism. To see what markets really think of QE, we suggest looking at relative returns. The UK underperformed world stocks during QE there. Japan has underperformed the world (in dollars) since QQE (they had an extra Q for extra oomph) started last April. The US outperformed, but we’d chalk that up to an economy dynamic enough to keep growing (slowly) despite QE. That, to use a horrible cliché, is the exception that proves the rule.
|By Takashi Nakamichi and Mitsuru Obe, The Wall Street Journal, 11/21/2014|
MarketMinder's View: Rightly so. As the numbers here show, it isn’t a net benefit. It boosted export values, but not volumes—gains largely came from currency conversion. Output didn’t get happy. Even worse, the weak yen jacked up import costs—not bueno in an import-reliant island nation that took all its nuclear power plants offline three and a half years ago. That squeezes businesses and households, particularly since wages stayed stagnant. Is it any wonder Japan is in its third recession in five years? For more, see Tuesday’s commentary, “Sinking Fortunes in the Land of the Rising Sun.”
|By Nathaniel Popper, The New York Times, 11/21/2014|
MarketMinder's View: Here is yet another example of the banker-bashing zeitgeist driving new, tougher regulations. This is sort of a running theme in US history. It was JP Morgan’s (and other banks’) squabble with Ferdinand Pecora and other political bigwigs that gave us Glass-Steagall. Have a panic, bash some bankers, make some rules, lather, rinse, repeat. Sometimes the new regulations are helpful, like the trifecta of securities laws in 1933, 1934 and 1940. Sometimes they are just things that fight the last war without much need or common sense, and that is the bucket these new rules seem to fall into. Regulators decided banks need more capital to offset their physical holdings of commodities and financial interest in infrastructure projects. Ooookkkkkkk. Look, we get it, no one wants another 2008, and “safety” is the watchword. But we are also fairly convinced banks’ owning warehouses with lots of metal in them won’t trigger another 2008. Yes, these assets are marked to market on banks’ balance sheets. But also! They’re liquid. We mean, not really, they’re actually metal in solid form, not molten. Financially liquid, priced to the minute in very public places, like the Internets. The prices also move on identifiable, predictable supply and demand factors, unlike the highly illiquid, thinly traded mortgage-backed securities that couldn’t handle mark-to-market in 2008.
|By Alen Mattich, The Wall Street Journal, 11/21/2014|
MarketMinder's View: Call us crazy, but we see little evidence a “currency war” (more boringly known as a “competitive devaluation”) is something anyone really wants to fight. For one, many in Japan are freaked out the yen is too weak, rightly acknowledging the pain it inflicts on businesses and households struggling to pay higher import prices. For two, the dollar and pound strengthened mightily against the yen over the past 23 months, and their economies were the fastest-growing in the developed world. For three, Japan’s closest competitors, Taiwan and Korea, saw trade rise and their economies grow even as the yen weakened. It didn’t hurt them, and they didn’t seem to see a need to devalue, and they are like fine. Armed with these three little nuggets of wisdom, and the argument in this doomsday fairy tale falls apart.
|By Staff, EUbusiness, 11/21/2014|
MarketMinder's View: So that’s nice. The time for fiscal stimulus indeed is when you’re struggling to bounce from recession. And the European Commission might have tucked some nice, pro-growth things in the package they’ll announce next week. But, reality check: It is a €300 billion package. The entire EU economy is about €13.1 trillion. So this is 2.3% of GDP. Kinda small.
|By Lawrence Lewitinn, Yahoo Finance, 11/20/2014|
MarketMinder's View: Full disclosure: We are bullish, largely based on the underappreciated growing global economy and a lack of political interference to zap it. That said, not all bullish arguments are sensible. “This,” in this case, is the fact the S&P 500 has posted double digit returns in three straight years only three times. If this year ended today, the period 2012 – 2014 would be the fourth. However, this is a meaningless statistic, however you slice it, and it incorrectly perceives how to use history in analysis. It is trivia, not analysis, and it has no forward-looking implications at all. None. We’re also wary of folks bullish because, “the trend is their friend.” We’re all for clever wordplay, but that isn’t how we forecast future market conditions. The trend and this trivial point are in the past. The past doesn’t predict future market moves. Now then, it wouldn’t shock us if the forecast levels (2100 and/or 2350) came to pass in 2015. But that is not an earthshattering forecast, considering the high end of that range is really only about 15% higher than the present.
|By Martin Crutsinger, Associated Press, 11/20/2014|
MarketMinder's View: With an October reading of 0.9%, the Conference Board’s Leading Economic Index (LEI) for the US has now risen in eight of the past 10 months. Eight of 10 LEI components rose, and the only negative contribution was from stock prices (average weekly manufacturing hours remained steady). But The Conference Board uses the average daily closing level of the S&P 500 to gauge this, which means that negative reading is entirely due to the brief spate of negativity at the start of the month (the actual index rose in October). Also, for investors, it’s probably best to strip out stocks if you’re trying to forecast stocks. All in all, it’s hard to find much to gripe about in this report—the US looks poised to keep on growing into the new year.
|By Peter Spence, The Telegraph, 11/20/2014|
MarketMinder's View: First of all, we fail to see how October’s purchasing managers’ index (PMI) readings indicate a “serious blow to hope that the recovery would resume towards the end of the year”—we still have a month and a half to go in 2014. Second, PMIs aren’t perfect gauges of economic conditions—they’re surveys telling you how many correspondents said output and demand rose (not the degree to which they rose). Three, calling for doom and gloom because of one country’s manufacturing number seems like cherry-picking. Even if that country is Germany, no single data point tells all about an 18-nation bloc. Four—and most importantly, in our view—composite eurozone PMI showed growth! The reading was 51.4—any reading over 50 indicates expansion. Grew! Not shrank! Dour sentiment is quite prevalent toward the eurozone—more than reality suggests is warranted.
|By Staff, The Economist, 11/20/2014|
MarketMinder's View: “Secular stagnation”—the notion developed countries are doomed to subpar future economic growth because of demographics—became a thing in the late 1930s. Then, folks feared an aging/falling population meant a falling labor force and a population requiring fewer goods. Fewer goods = less output = less economic growth = bad. You might think the 70-plus years of overall growth since would disprove that theory, but those concerns (and some others) have returned lately with gusto, underpinned by the belief aging populations in the US, Europe and Japan will hit consumption, slowing potential growth. In our view, this thesis is as off now as it was then. For one, demographic changes don’t sneak up on anyone—life expectancies have been rising, so more elderly people in the world isn’t going to shock markets or economies. And two, we have faith that innovative capitalists will continue finding ways to increase their future wealth—and the wealth of others—in ways we cannot even imagine today. Maybe you think that’s pie-in-the-sky thinking, but that’s what most people thought in the late ‘30s too. And we wouldn’t so readily downplay the creativity that can currently be found in in Energy, Biotechnology, 3D printing, mobile computing and more. For more, see our 6/24/2014 commentary, “Longer Lives and Other First World Problems.”
|By Matt Egan, CNN Money, 11/20/2014|
MarketMinder's View: Though these are fine signs to look for, the article actually misses the biggest red flag you’re dealing with a rat: They take custody of clients’ assets. Giving a financial professional custody of your money—rather than keeping it in an account in your name at a trusted, third-party custodian—makes it that much easier for him/her/them/it to run off with it for good. It is extremely difficult for a financial professional to make off with cash he/she/they/it can’t get their grubby, thieving hands on. For more, see our 8/15/2014 commentary, “Crooks’ Common Threads: Three Red Flags to Watch Out For.”
|By Matthew Boesler, Bloomberg, 11/20/2014|
MarketMinder's View: It is true the Fed cannot directly control long-term interest rates, and it is true the fed-funds target rate exerts some influence over longer-term rates (though we’d be remiss not to mention that Greenspan actually did tighten during the period referenced—he flattened the yield curve). However, the rest of this is really a whole bunch of speculation and searching for meaning in bouncy bond yields this year. It is also an attempt to forecast a rate hike, despite there being little history to suggest this is necessary or a risk. Look, call us crazy, but we are just pretty darn skeptical the US economy—which has grown above its post-war average 3.3% rate in four of the last five quarters—can’t handle a small interest-rate hike from the present 0 – 0.25% rate. The alleged “difficulty” in doing so this time, cited herein, is media hype.
|By Staff, Xinhua, 11/20/2014|
MarketMinder's View: Here are some more targeted stimulus measures to spur Chinese growth. For example, raising the loan-to-deposit ratio gives banks more leeway to lend, and encouraging more private banks aimed at small businesses can provide an incremental boost as China seeks to liberalize its economy. Now, nothing here is going to radically pump up China’s growth rate, but even if gangbusters Chinese growth is a thing of the past, that doesn’t negate China’s still-considerable impact on the global economy.
|By Jeremy Warner, The Telegraph, 11/19/2014|
MarketMinder's View: “It would be nice to think that merely by reforming the way money works we could magic away our economic problems, abolish the credit cycle, tame the bankers and generally cure the world of all known diseases. Yet there is no such thing as a free lunch. The reason we have fractional reserve banking, and a monetary system hedged around with taboos and constraints, is that warts and all, these things basically work. All alternatives are a giant leap in the dark, with likely disastrous consequences to judge by historical precedent.”
|By Matt Levine, Bloomberg, 11/19/2014|
MarketMinder's View: So we share this article mostly because it is great fun, but also because it does sort of highlight how technology’s advance is simultaneously great and terrible for investors. While it’s far off today, we shudder to think of all the behavioral problems that would results from an individual investor fixating on his or her city of stocks, worrying over a string of “rainy” (down) days or other factor. Realistically, greater visibility of markets provided just by the internet and 24-hour TV generate both transparency and promulgate emotional reactions to markets. And that’s only in 2D! For more, see Todd Bliman’s column, “Free to Fail.”
|By Kenneth Roberts, MarketWatch, 11/19/2014|
MarketMinder's View: Well, yeah, these are risks—though the first five all relate to the risk of lost principal. In our view, this too narrowly deals with the issue of risk, which is much broader. What about the risk you outlive your portfolio or don’t earn a sufficient return to reach your goals and objectives? What about the risk you fear the risks outlined here, sell out prematurely, and watch the things you just fearfully sold rise past you? That’s opportunity cost, folks, and it’s a very real risk.
|By Prof. Stephen Bainbridge, Professor Bainbridge Blog, 11/19/2014|
|By Amy Harder and Siobhan Hughes, The Wall Street Journal, 11/19/2014|
MarketMinder's View: In realityland (read: not Washington, D.C.) this isn’t a defeat for Keystone XL at all. You don’t need to pass a law to build a pipeline, you need the State Department to approve it, which the Administration has largely hemmed, hawed and opposed since moment one. This news, therefore, is actually not news at all. Hence, the passage (or non-passage, as it were) of this bill is really only a defeat for its sponsor, Louisiana Senator Mary Landrieu, who was bringing it as a measure to show how active she was on behalf of her constituency (largely pro-oil industry)—campaigning before the pending run-off election for her seat next month. And it remains to be seen if the bill’s defeat really even matters much for her re-election chances, too.
|By Simon Kennedy, Bloomberg, 11/19/2014|
MarketMinder's View: This presumes Japan’s sales-tax hike is responsible for the nation’s weak economy, which ignores the 2011 and 2012 recessions that we are guessing are not related to a tax hike that occurred in April 2013. The actual lesson from all this economic weakness? Japan needs structural reforms Prime Minister Shinzo Abe hasn’t delivered.
|By Editorial Staff, The Wall Street Journal, 11/19/2014|
MarketMinder's View: OK, party people: It’s time to set partisanship aside so you can see the sensible takeaway in this article. Now, for one, ignore the “special interest” angle and the politicized take on economic conditions, which isn’t really very accurate. But rather, the real takeaway here is the sensible viewpoint that Fed leadership and policy shouldn’t be determined based on the whims of the public or elected officials. The Fed is politicized to an extent—it basically cannot help but be somewhat, given its public role and the fact it’s an arm (tentacle?) of government. But we should be extraordinarily wary of efforts that would further subject central bank policy to partisan politics, and that applies regardless of your political affiliation.
|By Mitsuru Obe, The Wall Street Journal, 11/19/2014|
MarketMinder's View: The weak yen, peddled as export stimulus, is really not stimulus at all. Rather, it jacks up the price of imported goods and raw materials, raising energy prices and other input costs for businesses and consumers. Even the major multinationals who might benefit from growing exports aren’t clear-cut winners, in the sense export volumes haven’t increased significantly, and in many cases, whatever gain there is doesn’t fully counteract the rise in input costs.
|By Toko Sekiguchi and George Nishiyama, The Wall Street Journal, 11/18/2014|
MarketMinder's View: Monday, we discussed the possibility of a snap election. And today Japanese Prime Minister Shinzo Abe confirmed it. Not shocking—considering cabinet members alluded to it last week and Japan just fell in recession by one common definition. Abe’s latest move appears to be mostly politics. Absent this move, Abe’s term would expire in September 2015. Should he fail to pull Japan out of its current funk, he would likely face a more difficult election than he does today. Should he win the snap election, by contrast, his term would be extended by two years beyond next September.
|By Aaron Katsman, MarketWatch, 11/18/2014|
MarketMinder's View: The article’s discussion of risk isn’t quite on mark in the sense it largely equates volatility and risk. But the piece still offers a sound discussion of the risks presented by overconfidence. “In referencing researcher Terrence Odean's 1998 study entitled ‘Volume, Volatility, Price, and Profit When All Traders Are Above Average,’ Albert Phung wrote, ‘overconfident investors generally conduct more trades than their less-confident counterparts. Odean found that overconfident investors/traders tend to believe they are better than others at choosing the best stocks and best times to enter/exit a position. Unfortunately, Odean also found that traders that conducted the most trades tended, on average, to receive significantly lower yields than the market.’”
|By Asjylyn Loder, Bloomberg, 11/18/2014|
MarketMinder's View: While many have feared lower oil prices hitting production, it seems US shale drillers are finding ways—relying more heavily on their “prime properties”—to keep production up. Just goes to show drilling is becoming more efficient and technologically advanced, to the point that rig count doesn’t really equal output direction and earlier breakeven prices are likely an inappropriate benchmark today.
|By Danica Kirka, Associated Press, 11/18/2014|
MarketMinder's View: News flash: “Red warning lights” over slowing or stagnant growth have been “flashing” for years. The blinking eurozone light must be blinking less brightly than when it was in recession for 18 months during 2011 and 2012. The China hard landing light must be ready to burn out, too—it has been blinking since 2010. Japan, too, has long struggled to grow. The other Emerging Markets blinky light referenced here is not only an old factor, it’s a false factor—there is no evidence a tidal wave of capital swept into the Emerging Markets nations as a result of low developed-world interest rates, and even less evidence it will devastatingly recede. Meanwhile the bull market has continued to climb higher. These fears—bricks in the wall of worry—aren’t new or surprising enough to knock the bull off course. Plus, the global economy at large is still growing.
|By Matt Levine, Bloomberg, 11/18/2014|
MarketMinder's View: We won’t speak to whether Twitter is a good investment or not. However, the discussion about ratings agencies in general is a good one—showing just how backward looking credit ratings really are: “The thing about ratings is that they are typically a lagging indicator: The market usually knows a company's creditworthiness before the ratings agencies do.”
|By Matthew Lynn, The Telegraph, 11/18/2014|
MarketMinder's View: The heated debate over certain companies supposedly skirting corporate taxes continues, UK-style. Some believe one way to ensure companies pay their “fair share” is by enforcing a “turnover tax”—a set tax on total sales. But as with many government actions that may seem well intended, one must be wary of unintended consequences: “But, in fact, it is a terrible idea. Why? Because a tax based on turnover is a tax on investment. It penalises the companies that hang on to their profits and invest the money in new factories, products or distribution systems. The more we punish them, the less innovation and investment there will be – and that will be bad for everyone.”
|By Jim Brunsden and Nicholas Comfort, Bloomberg, 11/18/2014|
MarketMinder's View: If the standard you apply to regulating banks is, "A whole lot of banks failed in 2008, so clearly (insert practice here) was ‘woefully inadequate,’" then regulators will literally plumb every single practice in the industry. That’s a lot of testing—likely a time and money drain—especially considering we don’t even know what the next crisis will even look like! Further, there is no evidence bank modeling was behind the crisis or even a modest contributor. This just seems like yet another solution in search of a problem.
|By Jeff Macke, Yahoo Finance, 11/18/2014|
MarketMinder's View: This is the 32,093,249,083,249,023,490th* article that seems to think recent performance somehow predicts what’s to come for markets. But past performance (or the volatility) doesn’t dictate future returns. Period.
*Maybe a little bit of an exaggeration—but, if so, not by much. The Internet is big!
|By Max Ehrenfreund, The Washington Post, 11/17/2014|
MarketMinder's View: So here is the argument that lower gas prices are bad because they show a dearth of demand in the global economy. Which would be possible if demand weren’t rising (see 2009 for example), but it is. Just not as fast as supply. Also, the analogy here between oil price movements and the performance of a certain NFL franchise with a controversial name makes no sense. Demand for those tickets is falling because the team hasn’t performed well, not because the size of the stadium is growing faster than demand for tickets at said stadium.
|By Bob Veres, Financial Planning , 11/17/2014|
MarketMinder's View: In our view, clarifying roles, i.e. via clear job titles like “broker” for employees of a brokerage firm that sells products versus “adviser” for registered investment advisers would be a plus. But as for the rest, it’s a lot of stuff we agree with in principle. However, the fiduciary standard as it exists now does not actually ensure the folks practicing it act on such high-minded principles. The best way to make sure your financial professional is keeping your best interests in mind is to look at what they’re actually doing: What are their values? How does their philosophy, structure, business model, etc. put your needs first? What are their resources and what is their experience? Believing that all you have to do to right the wrongs in this industry and improve advice is slap a fiduciary rule on providers is the height of naivety. If a financial professional is a crook and/or a schlep, they’ll be a crook and/or a schlep regardless of the rule.
|By Lisa A. Rickard, The Wall Street Journal, 11/17/2014|
MarketMinder's View: This is an interesting debate worth following for investors. As we reported here last June, a court case in Delaware—where many large, publicly traded US firms are incorporated—resulted in firms being allowed to add a “loser-pays” provision to corporate bylaws, which would require the loser of a lawsuit to pay all court costs. The legislature is considering passing a bill that would ban this. This matters for stockholders because of the prevalence of securities class-action lawsuits filed against public companies—many of which seem frivolous. This could radically alter the playing field for filing class action suits, which could be a plus for corporations in the sense their legal costs could fall. On the other hand, proponents argue it would be a minus for investors in the sense these lawsuits police corporate directors’ behavior. That being said, it seems odd to us that “lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” We simply do not buy that all those are examples of beneficial lawsuits. Perhaps this provision goes too far, but it seems to us some reining in is overdue.
|By Jonathan Clements, The Wall Street Journal, 11/17/2014|
MarketMinder's View: The thesis: A 25% decline would put stocks more in line with reality and boost the outlook for the next decade’s returns (!). So let’s have a bear market now with an eye toward bringing the cyclically adjusted price to earnings ratio (CAPE) down? Folks, there is no predicting returns a decade out—using CAPE or any other measure—and even if you could know that, you’d be better off analyzing the cycles along the way (which most often haven’t been a decade long). And besides, CAPE—a comparison of 10 years’ worth of bizarrely inflation adjusted earnings to stock prices—is high today in part because of the 2008-2009 recession’s impact on earnings. This all presumes a certain degree of mathematical rationalism to market returns a decade away. That’s theory, but not reality. The economic data here are skewed too. Labor market improvements follow GDP, which follows stocks. GDP growth rates, too, don’t correlate one-to-one with stock market returns because GDP is a quirky government stat that oddly accounts for things like imports negatively. Stocks aren’t a quirky government stat.
|By Eric Morath, The Wall Street Journal, 11/17/2014|
MarketMinder's View: Seems to us this is heavily influenced by the Energy industry—manufacturing grew, while mining and utility output fell. Falling oil and gas prices weigh on the measure of production and could disincent future production growth, assuming they show staying power. But at this point, we’d suggest drawing big conclusions is premature, which makes a lot of this report overly dour.
|By Michael Heath, Bloomberg, 11/17/2014|
MarketMinder's View: China and Australia are already big trade partners, particularly in the mineral resources and energy fields. But they are now signaling their intent to free up additional trade. Assuming the deal is inked and passes, 85% of goods shipped to China from Australia will be tariff-free (with that number increasing to 95% upon full implementation). This deal also incrementally opens the door to services exports to China, which deepens the Sino-Aussie trade relationship in a significant, if mostly symbolic at this point, way.
|By Ambrose Evans-Pritchard, The Telegraph, 11/17/2014|
MarketMinder's View: Far be it from us to suggest that whenever you see a nation labeled the “Sick Man of Europe” you should be skeptical, but the last few have been rather wide of the mark. Belgium is no different. A recent GDP calculation revision—one designed to factor in illicit trades common in Amsterdam—is responsible for reducing GDP and inflating debt a wee bit. But here is the thing. No country has ever defaulted because of their debt-to-GDP ratio. They have defaulted because they can’t make interest and principal payments on debt, which is usually signaled by the market demanding much higher interest rates from the issuer. Belgium’s 10-year bond rates were 1.06% on November 16, their lowest point in the last seven years. That is the opposite of a debt-doom scenario. (Oh, and we’ll take the market’s opinion of this over Fitch’s any day. The raters are not reliable.) Finally, we demand a study proving that higher Math and Science scores translate to better cyclical economic performance. We’ve never seen them and we don’t believe the logic behind theorizing the two are related is very sensible.
|By Li Anne Wong, CNBC, 11/17/2014|
MarketMinder's View: Japan’s economy shrank -0.4% q/q (-1.6% annualized) widely missing the expected +0.5% q/q growth—leaving the Land of the Rising Sun in a technical recession (by one common definition). This is likely a bit of a shocker for those who thought Arrows One and Two of Prime Minister Shinzo Abe’s “Three Arrow” economic revitalization plan—fiscal and monetary stimulus—would spur Japan’s economy to growth, even after the sales tax hike last April. This leads many to suggest Abe will delay the second increase in the national sales tax, planned for April 2015. And that is possible. But while the sales tax hike likely did greatly heighten pressure on Japan’s economy, it isn’t the root cause of Japan’s overall weakness. That is largely due to structural economic factors—rigid labor markets, protectionism and other offshoots from Japan’s quasi-mercantilist economic structure. Delaying the sales tax alone won’t fix those factors. Only Arrow Three—structural reforms—will get that done. Abe hasn’t fired that one much yet.
|By Allan Sloan, The Washington Post, 11/14/2014|
MarketMinder's View: Here is our little secret, which is as old as the hills: There is no such thing as Wall Street versus Main Street. Wall Street and Main Street usually work together, for each other’s benefit. We realize we probably sound a bit high on sunshine and lemonade when we say this, but we’ve seen it for years. Let’s look at both of the issues myopically eviscerated in this article, corporate spinoffs and inversion deals. Think about why companies spin-off business units: Usually, it’s because they realize management at the top of a diversified conglomerate is stretched too thin, and the different segments of the business aren’t run effectively or to their full potential. The goal is to spin them off so they’re more efficient, providing better (and probably cheaper) goods and services to—you guessed it—Main Street! As for inversion deals, where US companies buy a smaller foreign competitor to get a new corporate address and avoid double taxation on international earnings, there are some tradeoffs, as this piece notes. But when a business is able to reduce its overhead, it can better serve customers. Finally, polls have long shown that more than half of Americans either directly or indirectly own stocks, so even to the extent this benefits the business, it also benefits the stockholders. Some of those people may live on Main Street (or Elm or First or … you get the point). Please do yourself a favor and don’t get suckered into this false conflict.
|By Chuck Jaffe, MarketWatch, 11/14/2014|
MarketMinder's View: As this shows, people really like to brag. When you hear fellow investors brag about their killer trades, and it sounds like they’re racking up the wins, it can be tempting to chase heat to keep up. The fear of missing out is real, and it can lead to dangerous trading decisions—and way more risk than is necessary to reach your goals. The lesson and advice here are timeless: “Worry about your own portfolio and whether it is reaching your goals, not about how someone else—with different resources, needs and risk tolerance—is reaching theirs, no matter how much they talk about it.”
|By Andrew Critchlow, The Telegraph, 11/14/2014|
MarketMinder's View: Oh dear. Ok so the logic is this: Oil prices are down, and there is some high-yield corporate debt in the Energy sector, and a guy estimates the default rate could be 30% if oil falls below $60/barrel, and that spike in defaults could trigger panic in the broader high-yield corporate bond market, and poof! It’s 2008 again. Unless Opec props prices. We won’t speculate on that one—you can’t game a disparate cartel with multiple competing interests that decides things behind closed doors. Regardless, the risk of this chain reaction unfolding as outlined looks small. Maybe some Energy debt does default, but the issue is sector-specific. Investors might well realize lower energy prices strengthen balance sheets in other sectors, which would limit the risk of contagion. Plus, we don’t have mark-to-mark accounting today, so any trouble wouldn’t ripple through the financial system the way subprime did in 2008. Mark-to-market is why $300 billion in likely loan losses turned into $1.8 trillion in largely unnecessary writedowns.
|By John Cochrane, The Wall Street Journal, 11/14/2014|
MarketMinder's View: We couldn't agree with this more. Slight deflation isn't a leading indicator of economic woe. "Hence the zero-bound worry. When interest rates hit zero and the Fed can’t move the broom handle any more, the top of the broom must topple into deflation. Except we hit the zero bound, and almost nothing happened. Maybe the economy isn’t so inherently unstable and in need of constant guidance after all. Bottom line? Relax. Every few months we hear a new 'biggest economic problem' from which our 'policy makers' must save us. Wait for the next one."
|By Mohamed A. El-Erian, Bloomberg, 11/14/2014|
MarketMinder's View: If the eurozone’s 18-month contraction didn’t end the global expansion, we fail to see how sluggish growth would. This piece tries to support its thesis with seven points, but they don’t hold water. 1) If every reporting country except Italy and Cyprus grew, the eurozone isn’t “sputtering.” 2) Prices are rising, not falling, and even if they were falling, deflation does not have the impact described here. 3) The impact of existing sanctions amounts to a few billion euro. Together, the current 18 eurozone countries exported over €3.1 trillion in 2013. 4) We don’t know what a “growth deficit” is. We suspect it’s high-falutin’ industry jargon having something to do with potential GDP, which isn’t real. But really, we don’t know, so, pass. 5) Actually, what they need is to create a better backdrop for banks to lend more, but headwinds are fading. 6) The world economy doesn’t have a fixed amount of growth the economic elves grant every year. One country cannot “steal” another’s growth. Sorry. And anyway, if the weak yen hasn’t helped Japan, why would a stronger yen hurt Japan and weak euro benefit euroland? 7) See point 1.
|By Editorial Board, The New York Times, 11/14/2014|
MarketMinder's View: Well, here is the thing: The link between interest rates and inflation is a whole lot weaker than this article gives credit to. What you really have to look to is whether monetary policy is choking growth or not, and even if the Fed does hike, that seems unlikely. But also, this gives much too much credit to Fedspeak, which isn't and has never been predictive. Finally, we struggle see the logic in the statement that, "financial firms that cater to bondholders" would want a rate hike. Why would they want to boost their funding costs? Why would they want existing bondholders to take a hit? Finally, why are financial firms catering to their lenders? They actually cater to their owners, which are stockholders.
|By Staff, EUbusiness, 11/14/2014|
MarketMinder's View: Well this is darned cool. Not much market impact, but still, cool! Estonia is launching a new program to allow anyone in the world to become an “e-resident,” without mucking up their home-country citizenship, so they can set up an online shop in the EU with minimal administrative burdens. Estonian officials believe this will make their country the world’s online gateway to the EU’s single market, and while only time will tell if they’re correct, the opportunity is pretty big. What can we say—we just love seeing former Soviet States get creative with free markets.
|By Ben Leubsdorf, The Wall Street Journal, 11/14/2014|
MarketMinder's View: Well lookie-loo. Actually, what’s funny here is the headline number was hurt by lower gas prices, since gasoline sales, ya know, are included in it. Excluding gas prices, retail sales rose 0.5%, which is nice. But it’s all largely meaningless. Low gas prices just shift spending from one category to another. As far as GDP is concerned, spending is spending.
|By Floyd Norris, The New York Times, 11/14/2014|
MarketMinder's View: There are two key omissions from this article, which we feel compelled to point out. One, it wasn’t really regulatory shortcomings that drove Hungarians to get mortgages from foreign banks. A lot of it had to do with a lack of confidence in Hungary’s financial system, including weak institutions and monetary instability. Two, the reason this is a problem is because Orban forced the central bank to drive down interests despite rising inflation, ultimately devaluing Hungary’s forint. This is a manmade problem, not a regulatory lapse, and Hungarians were caught in the crossfire.
|By Danielle Trubow, Bloomberg, 11/14/2014|
MarketMinder's View: Public service message: Consumer sentiment, like unemployment, is a dangerous, misleading statistic for investors to follow. It doesn't lead spending, and it tends to follow stocks rather than lead them. This should tell you everything you need to know about the gauge: "A stronger labor market, cheaper fuel costs, and near-record stock prices are brightening consumers’ spirits as the busiest time of the year for retailers gets under way." None of those are predictive.
|By Staff, EUbusiness, 11/14/2014|
MarketMinder's View: And Greece grew, too! As did most of the periphery, except Italy (no surprise), helping the full eurozone grow 0.2% q/q. The most interesting angle here, in our view, is sentiment-related. The general consensus seems to be that while growth in the periphery is nice, it isn’t enough to power the eurozone without bigger contributions from Germany and France. Mind you, these are the same countries folks feared would singlehandedly tank the entire currency bloc just three weeks ago. Looks like sentiment is morphing from deep pessimism to plain old skepticism?
|By Paul R. La Monica, CNN Money, 11/13/2014|
MarketMinder's View: This “fear-and-greed gauge” (which runs on a scale from zero to 100) swung from 2 (extreme fear) just a month ago to 65 (rather greedy) now. And consider: The publisher notes the same gauge registered a 12 reading on September 17, 2008—the first trading session after Lehman failed. And a 28 on March 9, 2009, the global bear market low. Suffice it to say we hear from a few investors and just flat out don’t buy those readings one bit. Nor do we think it’s fair to suggest folks were more scared a month ago than during the Financial Panic. That seems like revisionist history to us. But the reason this gauge is so bizarrely misleading is it doesn’t measure sentiment at all. It tallies put/call volume (assuming call volume = greedy, put = fearful, though there is a buyer and a seller for every security), a bunch of backward-looking price stuff like “momentum” and the number of 52-week highs, the VIX and the spread of stock returns versus Treasurys (of undetermined maturity). Most of these have nothing to do with sentiment. Folks, take it from us: Don’t believe this gauge accurately measures greed and fear.
|By David Evans, Bloomberg, 11/13/2014|
MarketMinder's View: As you read through this story, take note of the red flags: Questionable custody of assets. A complex strategy investors don’t seem to have understood. Promises of unreasonably high returns with no downside risk. Publishing their results themselves, like Bernard L. Madoff Securities’ statement generation department. There are more. And the victims aren’t exactly folks you might think of as the common dupe—they range from doctors to support managers. Learn from the lessons these unfortunate investors fell victim to. For more, see our 08/15/2014 commentary, “Crooks’ Common Threads: Three Red Flags to Watch Out For.”
|By Ben Carlson, A Wealth of Common Sense, 11/13/2014|
MarketMinder's View: While parts of this are a little overly simplistic, like the fact you can “improve your returns” by “buying low after there’s been a market crash,” overall we find this piece a sensible reminder of a few points: First, in showing the improved best/worst period returns for 10-year versus five-year rolling periods, it provides a useful reminder that the frequency of loss and subpar outcomes declines with longer holding periods. Second, it provides a nice counter to the mean reversion argument that stocks must fall simply because they’ve been up recently: “Based on this historical data, investors aren’t doomed to experience poor market returns going forward just because we’ve had solid performance in the recent past. Obviously, everything is circumstantial with the markets so anything is possible. That’s part of what makes investing so interesting and frustrating all at the same time. You can’t predict the future with any precision by looking exclusively at past data. There’s a caveat for every rule and market data point.”
|By James Shotter, Financial Times, 11/13/2014|
MarketMinder's View: On November 30, Swiss voters will decide if the Swiss National Bank (SNB) will be required to hold at least 20% of its assets in gold, never sell it and store it all domestically. While proponents believe this will keep the SNB from importing ECB monetary policy as its own, the SNB argues this initiative dashes its flexibility and impinges on its independence. While we aren’t suggesting the SNB’s policies—including the exchange-rate floor with the euro—are totally sensible, we find the notion of subjecting monetary policy to the whims of the public more concerning. Look, we aren’t saying central bankers are perfect—far from it—but politicizing monetary policy can have dire unintended consequences. The SNB isn’t big enough to overturn a bull—it’s more the general zeitgeist here we find troublesome. Finally, on a tangential note, this is very unlikely to put a floor under gold prices.
|By Nelson D. Schwartz, Clifford Krauss and Dionne Searcey, The New York Times, 11/13/2014|
MarketMinder's View: On a high level, we agree lower oil prices create winners and losers: Some folks will have a wee bit more discretionary cash to spend on fun stuff rather than gas, and some energy firms’ profits may get squeezed. But overall, we think this piece vastly overstates the economic benefits of cheaper gas. Even though it’s more than two-thirds of GDP, consumer spending is pretty stable and doesn’t fluctuate enough to make a huge difference in overall economic growth. Besides, spending is spending, whether it’s at your local gas station or favorite small business. This may merely shift consumers’ targets some. For more, see our 10/29/2014 commentary, “Falling Oil Prices: Consumers’ Boon, Producers’ Bust?”
|By Matt Levine, Bloomberg, 11/13/2014|
MarketMinder's View: An interesting discussion given recent news that banks were settling foreign-exchange rigging suits to the tune of $4.3 billion: There is evidence only one bank made money doing this, and only $99,000. We aren’t suggesting they didn’t make more or intend to cheat and make more, just pointing out rigging may not be as easy as some portray it.
|By David Evans, Bloomberg, 11/13/2014|
MarketMinder's View: Another article on foreign exchange, and a very interesting one at that. “Most retail currency investors lose money most of the time, according to the industry’s own data. Reports to clients by the two biggest publicly traded over-the-counter forex companies -- FXCM Inc. (FXCM) and Gain Capital Holdings Inc. -- show that, on average, 68 percent of investors had a net loss from trading in each of the past four quarters. These kinds of losses make for investor churn.” The reason for these issues? Forex is basically a short-term game that’s zero sum in the long run. Short-term investing strategies in most things tend to have far lower success rates. It is unsurprising to see that’s true here. By the way, in liquid, efficient markets, learning to trade the same way as thousands of others doesn’t present a repeatable advantage. To the extent the tactic worked, it will become discounted by the market nearly immediately.
|By Staff, The Economist, 11/13/2014|
MarketMinder's View: While we totally agree M&A is a cyclical business and at times the executive suite may be a bit drunk with greed, we would suggest that time isn’t now—and it actually wasn’t in 2007, either. (FAS 157 and the government’s haphazard actions truncated the bull market before it reached a euphoric point then.) In 1999, you would have seen the bubble better by analyzing the quality of M&A that was consummated—like the AOL/Time Warner deal. Also, by analyzing the impact on equity supply. Cash mergers contract equity supply (bullish, since it would require less demand to push prices up). Stock mergers don’t. The deals being made today are primarily financed by cash and debt, not stock issuances, and are more quality than slop—not what we saw near the Tech bubble peak.
|By Robin Harding, Financial Times, 11/13/2014|
MarketMinder's View: Newsflash: The current global expansion has continued despite a eurozone recession and Japan being, well, Japan. Also, suggesting the US economy is moving ahead because the government took the “right” steps while the eurozone took the “wrong” ones is bizarre. We actually implemented some austerity over the last few years and grew. They didn’t and didn’t. Besides, the eurozone is growing right now, not shrinking. Finally, while structural reforms in the eurozone and Japan would likely do more than fiscal and monetary measures to impact long-term economic growth, they aren’t integral for the world to move forward either. Seems to us Mr. Lew is more reflecting dour sentiment than the more middling reality.
|By Alan Tovey, Independent.ie, 11/13/2014|
MarketMinder's View: The loss of ten million jobs over 20 years (500,000 a year) to “robots” sounds daunting and may inspire some to raise an axe to the closest computer server. Technology will displace some folks—both winners and losers will emerge, with certain lines of work likely eliminated in full. But this focuses only on the downside: We can’t yet account for all the new jobs and opportunities that have yet to be created because of robots. After all, folks had the same fears when the sewing machine was invented. And the car! So before bemoaning a future doom that hasn’t happened yet, we suggest having faith in human creativity. Jobs are created and destroyed, but overall the world is better off because technology advanced.
|By Mark Schoeff, Jr., InvestmentNews, 11/12/2014|
MarketMinder's View: So to bring you up to speed in case you don’t follow the debate over investment advice regulation closely, there are two standards of care in the investment industry: The suitability standard and the fiduciary standard. The former applies to brokers and insurance agents, and it states that products/services sold must be appropriate for the client. The fiduciary standard—which many argue is a higher level of care—requires disclosure of potential conflicts of interest and requires the adviser to reasonably believe they are putting their clients’ interests first. For roughly the last four years, the SEC and other regulators have been considering whether to apply the fiduciary standard across the entire industry, a study mandated by 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act. Now SEC head Mary Jo White says she’ll state the agency’s position by year end. However, we’ve long since made our view known: Rules don’t govern actions and the quality of advice. Whether held to the fiduciary or suitability standard, values, resources, experience and expertise matter much more than a rule ever could. Arguing otherwise is to suggest you could transform an unethical, unintelligent, inexperienced broker into the world’s greatest adviser simply by shifting a few words around in Washington, D.C. If you buy that, some unethical person probably has a bridge or a variable annuity to sell you.
|By Anna Shiryaevskaya, Bloomberg, 11/12/2014|
MarketMinder's View: …in 2040!*
*Assuming this long-range forecast even proves accurate!
|By Dan Kadlec, Time, 11/12/2014|
MarketMinder's View: So, yes, if you are over 70 ½ years old and own an IRA, you are required to pull out a certain sum determined by your age and account value each year (creatively called a Required Minimum Distribution, RMD). And we are sure many folks haven’t taken their RMD yet, so you know, if this is you, you should probably be thinking about this. But let’s not overstate the case. There are seven weeks to go to fulfill this requirement (unless you just turned 70 ½ in 2014—then there are 20 weeks, as the deadline for newly 70 ½ year-olds is April 1, and you can probably safely skip reading this article). But you know, you should have this on your radar and plan to take care of it because as this article rightly but hyperbolically reminds, the penalties are HUGE! #TheMoreYouKnow.
|By Simon Kennedy, Bloomberg, 11/12/2014|
MarketMinder's View: The ratio between two commodities (Copper/Brent Crude) isn’t a forward-looking indicator of the economy, and Dr. Copper has long since had his? her? its? Economics PhD revoked. Let’s just say there is a reason commodity prices were removed from the Leading Economic Index long ago. Recent history also debunks this thesis. The ratio of Copper/Brent Crude fell from 2010 through June 2014, roughly when oil price volatility picked up. The economy grew the whole time. Copper prices have fallen since late 2010 and the economy hasn’t—it has grown. The reason both prices are down is supply growth is outstripping demand growth following a cycle of massive investment in mining.
|By Staff, Reuters, 11/12/2014|
MarketMinder's View: Could the structural reforms opening Mexico’s Energy and Financials sectors to more competition and foreign investment be bungled in implementation, creating a cyclical negative for their economy? Yes. Could the Fed make a significant monetary policy error, crashing Mexico’s economy and financial markets? Yes. But neither of these are probable, and in fact, both Mexico advancing reform and the Fed ending quantitative easing are probable positives, not negatives!
|By Diana Choyleva, Financial Times, 11/12/2014|
MarketMinder's View: We agree more quantitative easing and a weaker yen will not fix what ails Japan’s economy. They will increase energy costs and the prices of intermediate goods, which isn’t a plus for Japanese firms and consumers. But claiming this will trigger a currency war—nations enacting tit-for-tat devaluation to seek an edge in export competitiveness—misses that point too. But it also begs the question: Why would a currency war happen now? None of this is terribly new, and many politicians in Japan see issues with further yen weakness.
|By Lawrence Lewitinn, Yahoo Finance, 11/12/2014|
MarketMinder's View: The “greatest fear,” as far as we can intuit, is that the VIX is too low because there isn’t enough fear. Which is oddly self-debunking? But also, this operates on two notions (that both rhyme): When the VIX is high, it’s time to buy—especially if the trend is your friend. But VIX and trends are all just past, and investing on backward-looking factors is likely to go south fast. Trends turn, and a seemingly high VIX can still fly!
|By Jeff Eaglesham and Rob Barry, The Wall Street Journal, 11/12/2014|
MarketMinder's View: We didn’t really need investigative reporting to discover that brokers cluster where the money is—that’s true whether they are on the up-and-up or not. For the same reason, it’s unsurprising they target older folks, because they tend to have more money. Ultimately, no amount of targeted regulation or regulators eliminates all wrongdoing. Ultimately, it will be up to you to ensure the person you’ve found is aboveboard. So please, folks: Take our advice. Check out brokers on the Financial Industry Regulatory Authority (FINRA’s) Broker Check tool before investing with them. Also, check out Registered Investment Advisers here on the SEC’s webpage. Make sure you understand products peddled and think about the claims being made. Do they offer you a land of pure milk and honey? Do they try to scare you into buying a product? Those are red flags and you would be well served to take note. Listen, you might manage to skate through unscathed if you deal with an unethical or unqualified adviser—but you certainly would if you avoid them altogether.
|By Staff, The Yomiuri Shimbun, 11/12/2014|
MarketMinder's View: Japanese Prime Minister Shinzo Abe is set to meet with the head of his coalition partner, New Komeito, ahead of his planned “economic review” to determine whether to enact the second two percentage point jump in the nation’s sales tax rate in as many years next April. Abe is said to be leaning toward postponing the tax and holding snap elections to serve as a referendum—quite the gambit for a Japanese prime minister, given the nation’s propensity to rotate leaders often.
|By Matt Levine, Bloomberg, 11/12/2014|
MarketMinder's View: Reason #11,213,456,878.9 that efforts aiming to de-risk the financial system—especially efforts based on a near-complete misdiagnosis of 2008's causes—raise as many issues as they resolve. "It's interesting to think about how those designations would interact with the TLAC proposals. Is bank debt too risky for big insurers and asset managers to hold? Are insurers and asset managers too important to hold bank debt? If so, that would be a little weird. Someone has to ultimately bear this risk of bank failures. You need a sink, somewhere, for financial-system risk. That's an important job, and whoever does it is going to be important. But you can't protect them from the consequences of the job. Bearing those consequences is the job." For more on this topic, see Tuesday’s commentary, “Mark Carney Wants Big Banks to Save More—In Bullet Points!”
|By Phil Gramm and Michael Solon, The Wall Street Journal, 11/12/2014|
MarketMinder's View: The debate over income inequality is nearly entirely political—not an economic or market force, as some suggest. Statistical snafus like those detailed here are a key reason that is true. If you want to measure inequality, you must adjust for differences in household/employment structure, the system of benefits the country offers and the tax code—you can't count capital gains as income, because they are a function of wealth. As documented here, when you adjust just pieces of that, you reach different conclusions than those who warn inequality is a pox on our economic households. You must also account for the fact folks at certain income strata aren't the same! Mobility matters, arguably much more than income level. Look, whatever your political opinion of this, join us in wishing for some sensibly constructed data to argue over, at bare minimum.
|By Binyamin Applebaum, The New York Times, 11/11/2014|
MarketMinder's View: We would say the following regardless of which groups were pressing the Fed to be more “democratic” and cow to their interests: Politicizing monetary policy is a recipe for disaster. You don’t want to live in a place where the central bank cuts rates to squeeze out more growth before an election even if inflation is rising. A politically independent, objective Fed is far less likely to do harm. As is one staffed by people who most understand how monetary conditions affect the economy.
|By Mark Gilbert, Bloomberg, 11/11/2014|
MarketMinder's View: Actually, it is fairly normal for cost-cutting to drive earnings earlier in an expansion, when firms are still reeling from the downturn. Revenues become a more significant driver later on. Hence why comparing eurozone companies’ sales growth to US companies’ largely compares apples to oranges. Plus, it’s not like eurozone revenues aren’t growing for eurozone companies. They are—it’s just that earnings are growing faster. Seems right in line for a region growing slowly and hamstrung by weak bank lending.
|By Gregor Stuart Hunter, The Wall Street Journal, 11/11/2014|
MarketMinder's View: On November 17, China’s long-awaited “through train” is leaving the station. Choo-choo! This amusingly named program will allow foreign investors to buy Chinese domestic stocks (known as A-shares) through Hong Kong’s exchange. Overall, it’s another key step toward more open capital markets in the Middle Kingdom. But we’d suggest not rushing in blindly on the assumption more buyers means more demand and sky-high Chinese markets. As this shows, a few obstacles remain (e.g., fraud, investing caps, “lack of clarity in areas like capital-gains taxes and some controls placed on trading,” etc.). China does contain plenty of opportunities for investors focusing on Emerging Markets, but full analysis of political and economic conditions—and how they square with sentiment—is vital (as it is in any country).
|By Susie Poppick, Money, 11/11/2014|
MarketMinder's View: Yep: “As usual, [Monday’s new record high] was cause for skeptics to raise concerns that we are in the midst of a market bubble. But the headline numbers obscure a simple point: Record market highs are not unusual during a bull market—at all.” However, we do want to point out one thing: Stock valuations, overall and on average, are not “at or near historic highs.” One-year trailing and forward P/Es are about average. The wonky cyclically adjusted P/E ratio is elevated, but that means nothing—see this for why.
|By Bob Davis, The Wall Street Journal, 11/11/2014|
MarketMinder's View: While China and the US have some specifics to hammer out before the trade-pact is finalized (it will become official once all parties approve it at the negotiations in Geneva), agreeing to remove tariffs on things like “next-generation” semiconductors and MRI machines will likely be a win for all involved in the long term. Consumers should benefit too—more and cheaper choices—and stocks have long loved freer trade.
|By Joseph Adinolfi, MarketWatch, 11/11/2014|
MarketMinder's View: “The yen’s rapid depreciation, which has accelerated since the Bank of Japan announced a surprise expansion of its bond-buying program a week and a half ago, could help the island country’s economy by boosting exports and making it cheaper for Japan to pay down its sovereign debt.” We saw similar claims in early 2013, the first time the BoJ expanded its bond-buying program, and that big boost hasn’t come yet. A falling yen hasn’t really been a net benefit for Japan. It made fuel imports more expensive—weighing on both people and businesses. Plus, very few Japanese products are made solely with local parts and resources—a weaker yen makes the foreign inputs more expensive! As for Japan’s debt—yes, it’s quite large (but it’s still relatively manageable). But we believe Japan would benefit far more from economic reforms that boost long-term growth (and, by extension, tax revenues!) than implementing another sales tax hike.
|By Data Team, The Economist, 11/11/2014|
MarketMinder's View: We don’t think it’s a coincidence that Fed policy statements used more and bigger words as the Fed’s balance sheet swelled. Fedspeak—that unintelligible dialect full of riddles and hedging—was an effort at obfuscation since Alan Greenspan perfected the art of “mumbling with great incoherence” (as he put it) in the 1980s. It takes a lot of words to obfuscate quantitative easing (QE), the zero interest rate policy (ZIRP) and all the other acronyms. We’d suggest not reading into any of it.
|By Matthew Fassnacht, The Christian Science Monitor, 11/11/2014|
MarketMinder's View: Or other myths about holiday retail sales being wonderfully bullish, which this piece also guts. More people seem to believe in the Santa Claus Rally than believe in St. Nick himself, but the market phenomenon is as fake as its namesake. (Sorry, kiddies.) So why does it persist? We can blame our brains for that. Some find instances where markets boomed during that period and assume the pattern will hold true forever. But these observations have no predictive power—past performance doesn’t dictate future returns. Others try to ascribe fundamental causes, forgetting markets discount those widely known opinions and expectations. Plus, whether stocks have a jolly December shouldn’t matter much for long-term investors—longer-term trends matter far more.
|By Eric Rosenbaum, CNBC, 11/10/2014|
MarketMinder's View: This is largely a collection of market mythology and flawed advice. 1) Buying and holding—and rebalancing periodically—with zero regard for the market cycle is often a dead-end. While the S&P 500 has annualized about 10% since 1926 despite 13 bear markets along the way, we believe bear markets are identifiable and possible to navigate. 2) “Don’t keep your winners” is as flawed as “let your profits run.” The decision to hold or sell is nuanced and shouldn’t be based on past performance or backward-looking factors. 3) There is NO such thing as safe stocks. Any stock could go to zero under the right circumstances. This is the risk equity investors accept. 4) We fail to see how incrementally selling out of a rising market and buying into a falling one is a money maker. 5) Technology is cool and all, but what about behavioral errors? The emotional temptations to chase heat, panic, buy high, sell low, and weave in and out of stocks are where the real danger lurks. That is always hard and never easy.
|By Chuck Jaffe, MarketWatch, 11/10/2014|
MarketMinder's View: Correct. If sentiment were a self-fulfilling prophesy, bull markets would never end. Neither would bear markets. There also isn’t a magic, quantifiable, identifiable trigger point where sentiment gets too high or too low. And as this shows, there is no predictable or inverse relationship between sentiment surveys and ensuing market behavior. Our tip: Acting on feelings is indeed dangerous, but don’t ignore sentiment. It is a market driver. But not in a vacuum. What matters more is how sentiment squares with fundamental reality and what’s likely to happen six to 18 months or so out—are expectations too high or too low? (Incidentally, we think they’re too low.)
|By Staff, The Telegraph, 11/10/2014|
MarketMinder's View: Feel free to peruse the slides, but if you want to cut right to the chase, they are: Chile, Maurituis, The Philippines, Russia, Mexico, Indonesia, Sri Lanka, Pakistan, Argentina and Zambia. And the slides come with your very own how-to guide if you want to chase heat. We aren’t recommending for or against any of these countries, but we would humbly suggest trailing 14-year returns and the widely known information accompanying these photos should not be the basis of a buy decision. These are the sorts of pieces investors will have to contend more and more with as the bull market climbs on—staying grounded and avoiding the temptation to extrapolate the past forward is vital.
|By Graham Ruddick, The Telegraph, 11/10/2014|
MarketMinder's View: We noted with fond amusement last year that the Brits had imported Black Friday, and this year, it looks set to be even bigger! But on both sides of the Atlantic, holiday sales are more than just Black Friday, and total sales are more than just the holidays. It is a fun tradition (as long as no one gets hurt), and who doesn’t love a good discount! But it’s also just one day. The more you know!
|By Staff, The American Interest, 11/10/2014|
MarketMinder's View: Well, to some extent, but not for the reason cited here. The benefit isn’t that we send fewer dollars overseas to import oil and “a lot of the money that would have otherwise gone overseas will be spent instead on US-produced goods and services.” NEWSFLASH: When foreigners sell us oil, they usually turn right around and spend or invest those dollars here. Anything saying otherwise is wrongheaded protectionist rhetoric. The real reason they are sort of a boon to some people is they reduce manufacturers’ (and other businesses’) input costs, boosting margins and allowing them to invest more. But they also create losers—namely, Energy firms, who have harder times staying profitable when prices are down. As this piece highlights, pinched margins shouldn’t prompt firms to take shale projects offline in the foreseeable future—firms have economies of scale, and they think long-term. But better investing opportunities might lie in other sectors. For more, see our 10/29/2014 commentary, “Falling Oil Prices: Consumers’ Boon, Producers’ Bust?”
|By Dan Strumpf and Saumya Vaishampayan, The Wall Street Journal, 11/10/2014|
MarketMinder's View: Folks have bemoaned supposedly weak revenue growth for years, all the while claiming earnings come solely from cost-cutting, and firms are already too lean to cut back more. Yet revenues have grown all the while. They’re at all-time highs and still growing. The slow growth rate is mostly just math—the year-over-year comparisons are getting harder to beat. It’s all totally normal for a maturing bull market. As for stock buybacks, they aren’t inflating earnings. They boost earnings-per-share because they shrink the denominator, but the numerator—total net income—is what it is. And it’s growing.
|By Staff, The Yomiuri Shimbun, 11/10/2014|
MarketMinder's View: It might be about to get even more interesting in Japan, as some Liberal Democratic Party insiders say Prime Minster Shinzo Abe will probably call a snap election if he decides to delay the sales tax hike. And the election would effectively be a referendum on his Abenomics—particularly economic reforms. The goal? Getting voters to provide a firm mandate for that mythical third arrow, so he can have more clout against all the entrenched interests. But it could also result in another turn of Japan’s revolving door. It’s all very speculative at this point, but we don’t see either outcome making reform a whole lot likelier in the foreseeable future.
|By Neil Irwin, The New York Times, 11/07/2014|
MarketMinder's View: Yes, well, we don’t really materially disagree with the factoids included here, and most of this is a whole lot of nothing for investors. But there is one point here we want to highlight because it is dead-on wrong about what these data mean: “The labor market — and the economy more generally — has gained momentum as 2014 has progressed, judging from the readings of the job market. The latest numbers do not point to any acceleration of the trend, but neither do they point to deceleration. Rather, they reinforce what we thought we knew, and can give a bit of solace to anyone who interpreted a burst of financial market volatility last month as a sign that the economy was heading for the rocks.” (Italics are ours.) They do no such thing. While we agree the economy isn’t “heading for the rocks,” a late-lagging indicator (unemployment) cannot help you interpret forward-looking markets. There is a big logical disconnect there, and a dangerous one for investors to fall prey to as this bull market matures.
|By Ben White, CNBC, 11/07/2014|
MarketMinder's View: Hopefully! Here is a poem.
Midterm elections bring America political stalemate,
Government won’t accomplish much in Obama’s years seven and eight!
But rather than fear,
We think you should cheer!
That’s right—we’re suggesting you celebrate,
Because for stocks gridlock is great.
OK, so Keats we aren’t. But our point is that in a competitive capitalist economy, you don’t need government meddling around with rules and laws to generate economic growth. You’re better off with them out of the way! Sidelined! Laws rejiggering property rights, rewriting regulation and more aren’t plusses, they’re more often minuses. Gridlock prevents this. The absence of a negative is positive for stocks, which is why markets tend to rise in 86.4% of midterm Q4s and the subsequent Q1 and Q2. While the matching frequency of positivity is coincidental, that this is much higher than the typical quarter’s 67.8% isn’t. For more, see our 11/06/2014 commentary, “Goldilocks Gridlock.”
|By Morgan Housel, The Wall Street Journal, 11/07/2014|
MarketMinder's View: This is a fair illustration of the fact GDP doesn’t relate to future market returns, but all the math and number crunching is really very unnecessary because attempting to relate GDP to future market returns fails the logic test. GDP isn’t the economy. It’s a fair-yet-still-quirky government statistic about the economy, and it’s backward-looking by nature. Stocks, on the other hand, are forward-looking and are not a fair-yet-quirky government statistic. When you buy a stock, you do so on the presumption the company has a future and a future you want to be a part of. These are really two ships sailing past one another in the night. But also! The theory valuations are more useful—especially the heavily flawed Shiller PE—is equally faulty. Again, it’s backward-looking, and also earnings result from economic conditions. At the depths of a profit-destroying recession, P/Es typically soar (see: 2009). But that’s also a great time to buy, so you know, not predictive. Finally, the notion you need to forecast stocks out 10 years in order to successfully employ an active approach is just plain silly. No one can see out that far, but all you really need to do is relate sentiment to reality and project that over the next 12 – 18 months. Easy? No. Impossible? Nope.
|By Michael Batnick, Yahoo! Finance, 11/07/2014|
MarketMinder's View: An interesting post regarding the resiliency of markets generally. Now, we aren’t sure why the focus is on small-cap stocks in point #4, as stocks (foreign, domestic, big, small, etc.) generally outperform bonds over long periods. But that’s a minor quibble in an otherwise enjoyable article. This—this!—is also why all those gambling analogies about investing in stocks are flat wrong. When you invest for the long term in equities, you win far more often than you lose.
|By Michelle Jamrisko, Bloomberg, 11/07/2014|
MarketMinder's View: Jobs are up, and that's a good thing. The 5.8% unemployment rate—a flawed measure—matches the long-term average of this flawed measure! Hooray! (And that average holds whether you are talking about periods of recession or expansion. We checked.) But really, this is a plus in the sense unemployment is a personal tragedy for those affected. What it does not do, and should not do, is affect our outlook for the US economy or world economy. Unemployment—rising or falling—is a late-lagging indicator. You cannot formulate an outlook based on such factors. Hence, you should chuck all the talk herein attempting to discern meaning regarding future consumer spending.
|By Mark Gilbert, Bloomberg, 11/07/2014|
MarketMinder's View: Here are two basic economics lessons for all the ivory tower folks in regulatory or policy-setting positions the world over: 1) Private businesses (including, but not limited to, banks) are extremely flexible and very good at finding ways to avoid increased costs. 2) Whether it is imposed by elected officials or appointed ones, a charge from government is basically a tax, and when you tax something, you tend to get less of it. So let’s apply these to the ECB’s negative interest rates. Since their imposition (ostensibly designed to increase bank lending rather than hoarding excess reserves), banks have bought government debt with excess reserves, avoiding the negative rate. Second, they are passing the costs on to large depositors, so the ECB is indirectly taxing European savers. The net effect will likely be less excess reserves held in cash and less big depositors keeping big balances.
|By Jeremy Warner, The Telegraph , 11/07/2014|
MarketMinder's View: The title is bizarre here, which we encourage you to disregard, as the article says little about going up—it’s about the reverse, social mobility in a downward direction. And it is a sensible take on that, with a few minor quibbles (the quasi-luddite technology concerns about the destruction of white collar jobs, for example, or the fears of this all generating political instability). Rather, we suggest you focus more on parts like this passage: “If your father is a FTSE 100 chief executive, you are most unlikely to achieve the same social status, or indeed income, as he did, however much money is poured into your education, if only because these positions are rarities. You will therefore count as someone who in the Oxford study falls down the social scale. This type of downward social mobility is neither here nor there, and certainly nothing for policymakers to worry about. And it turns out that downward mobility is indeed more pronounced the higher up the social scale your parents happen to be.”
|By James B. Stewart, The New York Times, 11/07/2014|
MarketMinder's View: So this is a very interesting discussion of the issue of solvency vs. liquidity in a financial crisis. The Fed can (by tradition and law) lend emergency funds only to a solvent-but-illiquid bank. Officials claim Lehman was insolvent while Bear solvent in 2008, justifying their decisions. But many analysts—including some at the NY Fed—have dissented with this view. This is part of the problem FAS 157 presented: If all banks are judged on the fire-sale value of all illiquid assets, determining who is or isn’t solvent is going to be nearly impossible. Here is a smart quote from a guy: “Hal S. Scott, a professor at Harvard Law School and the author of ‘The Global Financial Crisis,’ says the bottom line is, ‘Solvent is pretty much whatever the Fed says it is.’ He added: ‘I have a lot of sympathy for what Geithner was trying to say. It’s difficult in the middle of a run or a panic to determine whether something is insolvent, because you don’t know how to value the assets. At the end of the day, it’s an art, not science. The issue of how does a lender of last resort determine whether an institution is, or isn’t, solvent has been one of the most difficult problems for a very long time.’” For more, see our commentary, “Independent for a Reason.”
|By Alen Mattich, The Wall Street Journal, 11/07/2014|
MarketMinder's View: Well, let’s be clear: Emerging Markets as a category haven’t done very well in total and cumulatively since 2011. This isn’t really new, and the lackluster returns for the last four years are certainly not tied to dollar strength or Fed policy, as both the changes cited herein are new. What’s more, we have seen no serious analysis suggesting Russia’s issues are due to the potential that the Fed would hike rates. That thesis is only believable if you ignore Ukraine, sanctions, oil price weakness and more. But above and beyond ignoring the broader trend and a couple of the year’s major news stories, the bigger issue we take with this thesis is the presumption that Emerging Markets are all subject to the same factors. These countries have huge differences from one to another, and that is likely behind performance differences this year. Also, why not mention China and India in this piece? We have a hunch it’s because they didn’t fit the argument.
|By Peter Eavis, The New York Times, 11/06/2014|
MarketMinder's View: On the one hand, we can understand why folks care about what central bankers say—these folks determine monetary policy, after all. That’s important! But on the other hand, putting too much stock into what one person says doesn’t make a whole lot of sense to us. Even though Janet Yellen, Mario Draghi and Haruhiko Kuroda are the ones most folks follow, they’re also just a single vote from an entire committee—they can’t act unilaterally. Central bankers also flub and slip on their words, or that type of thing. And given central bankers are human beings (we think), they can always change their mind—so reading too much into their words, words, words rather than their actions doesn’t seem to be a wise use of time. Whether on or off script, central banker-speak’s value is frequently overinflated by the media.
|By Staff, Reuters, 11/06/2014|
MarketMinder's View: Here it is folks, your nearly daily China-hard-landing-fear story. Yes, much of October’s data suggest slower growth—though we’re pretty sure most countries would be ecstatic with export and import readings of 10.6% y/y and 5.5% y/y, respectively. Yes, government officials may continue implementing targeted stimulus measures here and there to push growth along. But let’s look at the bigger picture. Chinese officials projected growth around 7.5 % for 2014. From 2011-2013, Chinese GDP grew 9.2%, 7.8% and 7.7%, respectively. Folks, China’s economy has been slowing for a while now—and that’s ok! It still contributes a ton to the global economy. Chances China comes crashing down due to the commonly offered theories (e.g., shadow banking, housing bubble, credit bubble) are slim.
|By Joshua M. Brown, The Reformed Broker, 11/06/2014|
MarketMinder's View: We agree with the general thrust of this piece. Studies have shown asset allocation—your portfolio’s mix of stocks, bonds and other investments—determines as much as 90% of your portfolio’s return. That’s a lot! But we would toss in one more important caveat here: Dealing with sharp short-term volatility is the price to pay for stocks’ long-term returns. Most investors believe they can handle the ride, but their actions suggest otherwise—there is nothing easy about investing. For more, see our 11/04/2014 commentary, “Taking Stock of That Great October Buying Opportunity.”
|By Jonathan Soble, The New York Times, 11/06/2014|
MarketMinder's View: This piece illustrates why we’re skeptical about the effectiveness of Japan’s “quantitative and qualitative easing” (QQE) policy. Ultimately, the BoJ’s program selects winners and losers—it is no panacea for economic growth. Yes, a weaker yen means cheaper exports, which can boost export activity for some businesses. But on the flipside, more expensive imports cancel those gains to an extent—and considering Japan imports most of its energy, this headwind affects just about everyone in the country. The actual fixes are far harder. For example, one analyst cited herein describes how Japan’s protective employment practices cause wages to stagnate—only real structural change, like labor reform, can solve this. This is why we think sustained Japanese outperformance is unlikely in the here and now. Abe is still chasing the easy button, but even in Japan, there isn’t any such thing as a free lunch. For more, see our 11/03/2014 commentary, “Another Sentiment-Driven Rally for Japan.”
|By Simon Kennedy, Bloomberg, 11/06/2014|
MarketMinder's View: So here the argument is that even though Japan and the eurozone are boosting bond buying by an amount that would offset the Fed’s taper, the Fed is super special so their taper will outweigh other central banks’ quantitative easing (QE). And perhaps that’s right—after all, US rates do have a global influence that likely exceeds Japan and the eurozone’s! (Though we quibble with the eurozone calculation because there is no clear announcement to speak of there.) However, the big misperception with this theory is the presumption that is bad for stocks. There isn’t any actual evidence QE stimulated the economy or markets, and both the UK and US economies sped up after QE tapering was on the horizon.
|By Matthew Boesler, Bloomberg, 11/06/2014|
MarketMinder's View: The worry is premature monetary tightening could knock the US expansion off track. While it’s true inappropriate central bank policy can create big problems—misguided Fed decisions tightened money supply and greatly contributed to the recessions of the 1930s—those conditions aren’t present today, and in our view, this concern is overwrought. The end of quantitative easing wasn’t tightening (as loan growth has accelerated this year) and rate hikes alone have no history of being either an automatic good or bad for markets or the economy. The 1937 angle to this is really just dressing up these long-in-the-tooth fears.
|By Summer Said, Keyal Vyas and Sarah Kent, The Wall Street Journal, 11/06/2014|
MarketMinder's View: Falling oil prices seem to be exposing some fractures in the Organization of the Petroleum Exporting Countries (OPEC). Over the past few years, global (and particularly non-OPEC) supply has grown far faster than demand, pressuring prices. Lately, the pace has picked up, as Saudi officials have slashed prices and maintained output in an effort to keep or win market share. All this has sent OPEC countries dependent on higher prices—like Venezuela—scrambling. While there is no direct market takeaway in the here and now, how this situation develops—and potentially impacts global Energy markets—is worth following.
|By J.D. Harrison, The Washington Post, 11/05/2014|
MarketMinder's View: The “what it doesn’t mean” section seems largely realistic—major overhauls like an Affordable Care Act repeal probably aren’t in the cards (you are free to “huzzah” or “boo” as you wish), but the US/EU free trade deal just saw its chances improve. The “what it does mean” section, however, is full of things the GOP likely can’t do. (You are free to “huzzah” or “boo” as you wish.) They might want to overhaul the tax and immigration codes, they might try, and they might even pass something, but they don’t have the seats to override the President’s veto. We say the following with no bias and no party preference: Gridlock is good and prevents legislation creating winners and losers. Markets like this, even if people don’t.
|By James Titcomb, The Telegraph, 11/05/2014|
MarketMinder's View: So let’s think this through. We’ve already seen how eurozone banks are parking their spare cash at other central banks (the BoE and Fed) and in government bonds to avoid the ECB’s negative deposit rate instead of lending a ton more. Then some started slapping deposit charges on big corporate clients. Now some are making retail customers—normal savers—pay to keep their money in the bank. So on the one hand, they aren’t lending more. On the other, customers have incrementally less money, which reduces the overall money supply. Seems a bit deflationary, no?
|By Frank Paré, Time, 11/05/2014|
MarketMinder's View: What we take from this wise piece is the following: As a wise woman used to say over and over, “Clarity is a social matter.” It doesn’t matter if the language your adviser uses is clear to them, or if they use fancy charts to really WOW you. Your adviser should be able to clearly state how that information relates to your goals and objectives. What’s more, and this is not addressed here outright but is tangentially related and vital, they should be able to explain how their strategy works in similarly clear, easy to understand language.
|By Peter Eavis, The New York Times, 11/05/2014|
MarketMinder's View: We’re starting to wonder if the Fed and its regulatory kin want banks to lend to anyone ever. First they squash the yield curve with quantitative easing, making lending less profitable and discouraging banks from extending traditional loans to supposedly riskier borrowers, like smaller firms with less-flush balance sheets. Then banks find a way to lend to some of these firms anyway by acting as the middle man between firms and hedge funds, who ultimately own the loan—but need the banks to arrange the deal since hedge funds are generally not in the business of direct corporate financing. Now regulators are saying “ooooo, no, you can’t do that, because 2008!” Except last we checked, an abundance of these so-called leveraged loans didn’t cause the crisis. Leveraged loans were written down in 2008, like everything else, but the real culprit was mark-to-market accounting, which required the funds that planned to hold these loans to maturity to value them at whatever they could get in a firesale tomorrow. Funds today don’t have to mark long-term assets to hypothetical firesale. Banks and firms have simply found a creative, market-oriented solution to a problem created by Fed policy. (And if regulators crack down on this, we suspect banks will create another solution, because businesses in need of profits are usually innovative, and there is clearly demand for credit.)
|By Thomas J. Brakke, The Research Puzzle, 11/05/2014|
MarketMinder's View: Hear ye, hear ye: Volatility isn’t risk. Volatility is quantifiable. Risk isn’t. When you see “risk” labeling an axis on a chart claiming to show the tradeoff between risk and return of a given security or asset class, you should be highly skeptical and perhaps back away slowly, because you cannot put a number on risk. Measures like beta and standard deviation tell you how much an investment has moved in the short term. They do not measure the risk of absolute total loss, the risk that this investment will not achieve your long-term goals, or any other life-impacting issue. (They are also backward-looking.) These charts simply illustrate the tradeoff between expected short-term volatility and long-term return. Important! But not risk. (Those of you who have a bit of time to kill and would like to read more might enjoy clicking on the blog post’s first link.)
|By Keren Tumulty, The Washington Post, 11/05/2014|
MarketMinder's View: Looking for a deep analysis of what Congress likely can and can’t do over the next two years and why? This article is for you! Possible: incremental measures like infrastructure improvement, trade deals and the Keystone XL oil pipeline. Nigh-on-impossible: anything big. (Goes-without-saying probable: raising the debt ceiling next year.) Why? Gridlock, obviously, along with the fact a lot of these cats are already in 2016 campaign mode. All indicators point to a government that can’t do anything radical to spook markets for two years. (But they will probably grandstand and bicker a lot, on both sides of the aisle, because that is what politicians do.)
|By Jennifer Ryan, Bloomberg , 11/05/2014|
MarketMinder's View: Calling output at 56.2 and new orders at 58.3 a "slump" is a wee bit wide of the mark. Yes, they are slower than September's. But both those figures are solidly expansionary in this, the UK's dominant economic segment reflecting roughly 80% of GDP.
|By Caelainn Barr and Theo Francis, The Wall Street Journal, 11/05/2014|
MarketMinder's View: Well that’s fun. Ireland announced a while ago it would end the “Double Irish” provision allowing firms to do some funky maneuvering to avoid royalty payments on intellectual property. But the legislation killing the Double Irish also eliminates—wait for it—corporate taxes on intellectual property! They’re just swapping a complex, internationally derided structure for a streamlined, transparent one. Firms won’t lose this benefit after all. (Assuming it passes and the EU doesn’t sue and all that jazz.)
|By Ben Martin, The Telegraph, 11/05/2014|
MarketMinder's View: So here’s the thing about the EU’s forthcoming crackdown on so-called dark pools (really just private stock exchanges) and calls for the US to do the same: Maybe just maybe it isn’t entirely necessary? As the London Exchange’s move shows, the public exchanges really want to stay in business and maintain market share, and they’re ready and willing to innovate and beat the dark pools at their own game to do so. Our hunch: Let the market deal with this, and you get a wave of innovation that makes stock trading even cheaper and easier than ever before. Which is sort of a win for everyone!
|By Victoria McGrane, The Wall Street Journal, 11/05/2014|
MarketMinder's View: So it’s official: A bank can’t buy another bank if the transaction would leave them with over 10% of the US banking system’s aggregate liabilities (deposits and the like). Old news, been a long time coming, doesn’t prevent banks from growing that big or bigger on their own, and doesn’t force big banks to shrink. But! Here’s a question: Will the Fed go totally hardline on this rule the next time they need big solvent banks to buy failing banks during a crisis? The rule grants an exception in these circumstances, so we’re optimistic, but it’s something to keep in mind the next time things look ugly, whenever that may be. On the bright side, it’s encouraging to see the Fed added that exception, as it suggests they don’t totally plan on chucking the traditional crisis management playbook. Also, it suggests they’re aware they haven’t ended bank failures forever and ever, amen. Points for realism!
|By Mark Gilbert, Bloomberg, 11/05/2014|
MarketMinder's View: Well, actually, both the ECB and BoJ need a refresher on the quantity of money theory, if you asked us. Boosting central bank balance sheets and bank reserves doesn’t boost the economy. The economic boost comes from increasing the quantity of money. In fractional reserve banking systems like the eurozone and Japan, banks increase the quantity of money by lending. When central banks buy long-term bonds, they reduce long-term rates and flatten the yield curve, reducing lending, the quantity of money and overall growth. Massive quantitative easing can’t fix all that ails Japan and/or euroland.
|By Josh Boak, Associated Press, 11/04/2014|
MarketMinder's View: A widening deficit due to falling exports isn’t the best news. But we wouldn’t draw too much about the health of the US economy based on any one month. Further, attributing the reading to a strong dollar—supposedly making exports less attractive abroad—seems premature at best. Most economists agree currency valuation changes do not have an immediate impact on export orders, usually logged months in advance. They also do not have a direct, one-to-one effect, as exports can and have risen while the dollar strengthens. To us, the real story in this report is the influence of oil prices and volumes shipped: More than half of US exports’ decline was petroleum (refined products, fuel oil, etc.) products, and non-petroleum imports hit a record high. Price volatility is a key issue to consider in interpreting these data. With that said, imports also shouldn’t be viewed as a negative or a “drag on growth”—they indicate healthy domestic demand.
|By Yoshiaki Nohara, Toshiro Hasegawa and Kana Nishizawa, Bloomberg, 11/04/2014|
MarketMinder's View: Japan’s Government Pension Investment Fund (GPIF) recently announced an allocation shift—less bonds, more stocks. That means they’ll probably have to buy around $86 billion worth of Japanese stocks and $115 billion in global stocks outside Japan—big numbers! But will these purchases ripple markets? Let’s scale: The Japanese purchases only amount to 2.75% of Japan’s investable market, and the purchases outside Japan amount to a (whopping!) 0.33% of the MSCI World ex-Japan’s investable universe—tiny in the grand scheme of things. For more, see our 11/3/2014 commentary, “Another Sentiment-Driven Rally for Japan.”
|By Jon Stein, CNBC, 11/04/2014|
MarketMinder's View: The 4% rule was never exactly intended to be precise investment advice, which can be delivered only by a professional who has deeply explored the needs and finances of their client. Now, as noted here, if you base your entire retirement plan on one 20-year period of historical investment results, you are taking an enormous risk. Yet no rational professional with any expertise would do this, when they can easily use a Monte Carlo simulator that combines thousands of different results and tests your withdrawal rate over that span. The key is, as it has always been: Know where you stand; know where you need to go; know what you can trim expense-wise if you have to. Those three steps are much more significant than any “rule” or guideline. Here is some far more useful counsel, in our view.
|By Stan Haithcock, MarketWatch, 11/04/2014|
MarketMinder's View: We encourage investors to perform thorough due-diligence on every investment product and adviser they’re considering—we wouldn’t tell anyone to blindly hate any product without checking the facts first. That said, facts are in short supply in this piece, which amounts to annuity marketing spin, above all else. The words here all amount to opinions about annuities and off-base analogies designed to give potential buyers the warm fuzzies. They have little bearing in reality, and many don’t apply to the variable and equity-indexed annuities usually peddled to long-term investors. We humbly suggest anyone considering an annuity cast a wider net—maybe look at the pieces FINRA and the SEC have published exposing variable annuities’ drawbacks and conflicts of interest. It is true all annuities aren’t created equal—our beef is mostly with variable and equity indexed annuities. But again, facts—not opinions—should be the basis of your investing decisions. In our view, the annuity industry wouldn’t have such a hard time with all this if they would just explicitly and clearly define upfront all the fees and features in a pamphlet that isn’t 100 pages long and packed with legalese. Our quibble isn’t that these products should exist, but rather, that the information about them should be clear and accurate enough to let potential annuity owners decide for themselves. Before you argue it already is, please take a gander at the thickness of a typical variable annuity prospectus.
|By John Melloy, CNBC, 11/04/2014|
MarketMinder's View: We are big fans of getting the markets’ opinion of events, but this is going much too far: “An equal-weighted portfolio of the stocks that represent the purest plays on a Republican-controlled Congress—like natural gas shipping, for-profit education and medical devices—is up 23 percent in 12 months, the timeframe in which investors began to place bets on this election. Meanwhile, a portfolio of the stocks made up of Democratic pure plays—like solar energy and hospitals—is up just 9 percent over the last 12 months. The S&P 500 is up 16 percent over the same period.” That is correlation, but the causation is lacking—if the Republicans take both the Senate and House, there will still be gridlock because they can’t force the President to sign laws. It also is overly precise to claim 12-months is THE EXACT timeframe in which investors placed “bets” on the outcome of this election. Finally, investors don’t place bets—speculators do that. The stock market, as measured by the S&P 500, pays out in 72% of rolling 12-month periods—show us a casino that does that and we’ll show you a casino stock to sell short.
|By Michael P. Regan, Bloomberg, 11/04/2014|
MarketMinder's View: The V-shaped stock charts under such intense scrutiny here are those headscratching wiggles from October that seem to have really flummoxed some technical analysts. But there is little reason to go break out the scalpels, beakers and forceps because these charts tell us only what happened in the past, not what’s to come. Markets are not like the physical sciences, where studying a graph of what happened will yield perfect lessons for the future. We would also suggest the claim, “Sharp breaks in trend followed by sharp rebounds is not healthy,” overlooks how sentiment-driven moves both begin and end.
|By Andrea Ferrero, The Economist, 11/04/2014|
MarketMinder's View: We’d argue the main lesson the ECB should learn is that quantitative easing (QE) wasn’t very effective in the US. Yep, QE lowered long-term interest rates. As a result, it lowered loan profits, which are often tied directly to the spread between short-term interest rates (funding costs) and long-term interest received, and money supply growth was slow—far from inflationary or stimulative. Since banks typically like to make money on loans they extend, this dampened loan supply. Is there a counterfactual for this? Nope. But there is more than a century of historical evidence and theory supporting the predictive quality of the yield curve. With that said, will QE really help the eurozone?
|By Staff, The Yomiuri Shimbun, 11/04/2014|
MarketMinder's View: So 26 years from now Japan’s growth may turn negative, according to a policy think tank—a long-term forecast which you could be forgiven for thinking is near-complete speculation. But it is also speculation on a factor—demographics—that changes and shifts too slowly on balance to materially impact markets or economies. Besides, there are myriad policy shifts, technological innovations, societal changes, etc., that could morph between now and then, alleviating the issue near totally. We would humbly suggest Japan has other issues much more significant to both the here-and-now and the long term: like an outdated labor code, trade protections, conglomerate-dominated corporate sector and more. Those issues are key, though we would not be surprised if Abe pays nothing more than lip service to fixing them.
|By Staff, EUbusiness, 11/04/2014|
MarketMinder's View: France. Italy. Recession. Deflation. And the list goes on. These fears have long been chewed over—hard to see how the European Commission citing a bunch of old fears is really the titular “New Blow to Recovery.” Seems to us like it’s “More of the Same for the Eurozone.” Oh and this is all a forecast revision! Because the prior forecast was wrong! So maybe this one proves to be, too? It’s odd, but we find ourselves agreeing with the unnamed French finance ministry source who said the EU figures were, “purely theoretical” and “meant nothing.”
|By Mohamed A. El-Erian, Bloomberg, 11/03/2014|
MarketMinder's View: The good? The S&P 500 and Dow rebounded from their October dips—even setting new record highs. Yayyyyyy! The bad? Stocks bounced only because some earnings news was good, investors apparently bought on the dips, there was lots of cash on the sidelines, and Japan hit its quantitative easy button again. Meanwhile, oil is still down and bonds are still up, so we are supposed to avoid getting too comfy, because economic fundamentals don’t warrant big gains. Look, this is all just another take on the “slow growth was good enough for five and a half years but isn’t any longer” meme we’ve seen around the Internets these last few weeks. We don’t buy into any of it. Stocks and GDP don’t have a 1:1 relationship. Heck, neither do stocks and earnings! P/E multiples usually expand as bulls mature and investors gain confidence. Stocks have never needed rip-roaring growth. Just a reality that outpaces expectations, which is what we have today.
|By E.S. Browning, The Wall Street Journal, 11/03/2014|
MarketMinder's View: Could Vladimir Putin, rate hike fears and high P/Es kill the Santa Claus rally this year? Um, who knows? Three-month stretches are impossible to predict with any certainty. That said, this is really a false choice. The Santa Claus rally isn’t any less mythological than the January effect, Sell in May, the September Swoon or any other seasonal adage. Nor are the long-feared “events” any likelier to have an actual impact on markets and economic growth today than they have been for the last several years. Maybe we get some sentiment-driven wobbles over any of these or some other thing, maybe we don’t. We’d suggest looking longer term than three months and looking at fundamentals, not fears: The world is growing, a gridlocked US Congress likely can’t rewrite property rights or otherwise scare the heck out of stocks, and most investors don’t fully appreciate either of those things.
|By David Kaufman, Financial Post, 11/03/2014|
MarketMinder's View: This makes some sensible points about short-term volatility’s fleeting nature, but its advice falls short in our view. It encourages investors to let their emotional comfort with volatility be the primary determinant of their asset allocation, and it suggests everyone keep a hedge of “alternative allocations” to help them sleep at night. Personal comfort is a fine thing to consider, but we think your long-term goals and time horizon should be the first, largest considerations. Figure out what you need and want your money to do for you over time, identify the long-term returns you need to get there, and then consider the tradeoffs between long-term growth and short-term volatility. If you let your comfort with volatility be the guiding force, without any thought of your actual goals, you could run a very real risk of running out of money too soon if you need your portfolio to fund living expenses.
|By Staff, Reuters, 11/03/2014|
MarketMinder's View: ISM’s manufacturing Purchasing Managers’ Index jumped to 59.0 in October from September’s 56.6, trouncing expectations. Order backlogs (up six percentage points to 53.0) and forward-looking new orders (up 5.8 percentage points to 65.8) led growth. Though just one month, it’s another sign the US expansion continued last month, and it runs counter to the latest round of slowdown fears.
|By Paul Krugman, The New York Times, 11/03/2014|
MarketMinder's View: Who gives the best economic advice: Economists, with their knowledge of theory, or business leaders, with their real-world experience and savvy? This piece votes “economists” all the way, claiming business people who said quantitative easing (QE) would devalue the dollar and cause hyperinflation were clearly wrong, and the economists who knew better were clearly right. And hey, that’s one way to look at it. But here’s another: QE was based on demand-side economic theory—make credit cheaper so folks will be more eager to borrow—but in reality, loan growth was the weakest in post-War history. Why? Banks kept supply tight. QE shrank the spread between short and long rates, shrinking banks’ potential profits and making them less eager to lend. We can’t know why the economists in charge of the Fed (and BoE) missed this, but we do know business people are generally more prone to consider things like profit motive and how that impacts businesses’ actions. That isn’t to say one group is better than the other! Just that there are two sides to every debate, and a lot of this stuff is a matter of opinion.
|By Ambrose Evans-Pritchard, The Telegraph, 11/03/2014|
MarketMinder's View: This piece puts UK home prices in perspective, countering the still-widespread belief UK housing is back in bubble territory. For example, real home prices (adjusted for inflation) are still 35% below their 2007 peak. Most of the price increases are concentrated in London, where only 14% of England’s population resides. The UK doesn’t have a housing bubble. It has a severe supply shortage in London.
|By Jason Zweig, The Wall Street Journal, 11/03/2014|
MarketMinder's View: Master Limited Partnerships (MLP) have their time and place, but we’d suggest looking beyond those eye-popping yields and weighing all the pros and cons. MLPs are essentially a very narrow play on US energy markets with a different tax treatment than stocks. Comparing stocks’ earnings and dividend yields to MLPs’ isn’t the best way to gauge which is best. With stocks, total return matters more. So do diversification, flexibility, Uncle Sam and many others.
|By Matt Moffett, The Wall Street Journal, 11/03/2014|
MarketMinder's View: Even if the Constitutional Court doesn't block Catalonia's planned November 9 "vote" on independence, it doesn't much matter: This is a non-binding, unofficial vote that most acknowledge is more opinion poll than referendum. For more, see our 10/15/2014 commentary, “Return of the Euro Crisis’ Ghosts.”
|By Toru Fujioka and Masahiro Hidaka, Bloomberg, 10/31/2014|
MarketMinder's View: So we have this sneaking suspicion that these moves—¥10 trillion more in “quantitative and qualitative easing” (QQE) and boosting the national pension fund’s equity allocation—are coordinated, as Shinzo Abe sought a buyer for all those bonds he’s about to sell. But aside from that! These moves clearly stimulated sentiment, but they likely won’t stimulate actual output or Japanese stocks. The pension thingy has been telegraphed nearly two years now, and it would be bizarre if markets hadn’t already (mostly) discounted it. As for QQE, it was a negative at ¥70 trillion annually and is still a negative at ¥80 trillion. It hasn’t done anything but boost bank balance sheets and flatten the yield curve.
|By Chad Bray, The New York Times, 10/31/2014|
MarketMinder's View: After deliberating for a couple years, the BoE finally set the leverage ratio for UK banks. For most banks, the minimum will be 3% (capital to total assets, not risk-weighted) by 2018. The biggest banks will have a higher threshold (unspecified, but estimated at just under 5%) and earlier deadline (2016). Most expected tougher, but this makes the BoE a touch more flexible than the Fed. The biggest banks are also pretty near compliant already and should be able to get there in time without unplanned capital raises. As ever, we don’t think this spells the end of bank failures—you can’t de-risk finance!—but it shouldn’t be a huge headache either. Considering this has been in the cards for years, banks (and markets) have had plenty of time to prepare.
|By Ben Wright and Denise Roland, The Telegraph, 10/31/2014|
MarketMinder's View: Not just World War I bonds! (And actually they’ll still have about £2 billion in open-ended WWI debt outstanding after this.) This also closes the book on—wait for it—the taxpayer bailout of the South Sea Company in 1720. And you thought TARP took too long! Her Majesty’s Treasury is also paying off debt used to fund Irish famine relief in 1847, the Napoleonic Wars and the Crimean War. All of which helped ratchet UK debt-to-GDP up to nosebleed levels. And they’re just now paying it off! (And not even paying it off, because they’re probably rolling it over to lower-yielding gilts—this is just smart financial management.) Ladies and gents, if you ever needed proof high debt doesn’t doom, this is it. (Also: They don’t make posters like they used to.)
|By Mark Gimein, Bloomberg, 10/31/2014|
MarketMinder's View: The theory here, of course(!), is that that markets can’t get enough
cowbell quantitative easing (QE). However, the market has known since May 2013 US tapering was approaching—and even a reality at the end of 2013. Yet stocks went up a lot. The correlation shown in the chart included is not convincing. There was a little matter called “The Global Financial Crisis” that hit in 2008 that made the chart look like that. It was not the end of Japan’s 2001 – 2006 QE, which occurred two years before the bear hit.
|By Mark D. Cook, MarketWatch, 10/31/2014|
MarketMinder's View: So, this seems a lot like a longstanding bear doubling down on an earlier call that hasn’t materialized. But can we share a little insight about the “three components” this “leading indicator” the call is based on—the “CCT”?
“The strongest component is the duration of buying versus the duration of selling. A healthy bull market sees mostly buying, indicated by the NYSE tick.” But wait. There is a buyer and a seller in every single transaction, forever and always. So, whaaaaaaaa?
“A second component of the CCT focuses on the NYSE “big block” buying and selling in isolated segments of time. This is different than the duration component, as it measures isolated situations of what fund managers are doing. A strong bullish market has numerous big blocks of buying. A print on the NYSE tick in excess of +1000 signifies fund buying by numerous entities, which accompanies a healthy bull market.” So no managers sell big blocks when they expect a bear? No fund managers are ever wrong and buy into a bull? Evidence like 2000-2 suggests that is flat wrong. Further, why is the NYSE the only market cited? The US is dotted with trade venues. What if the fund—as most do—uses a dark pool?
“A third and final component is the cumulative number of the NYSE tick. Each day I record the amount of total plus tick, less the amount of minus tick, on the NYSE. A bull market has a tight correlation of a up day for stock prices corresponding to a plus day in the cumulative NYSE tick.” Not if market breadth is falling, which is typical in a maturing bull and has been ongoing all year. But again, why only look at the NYSE? This is not how the market functions.
|By Daryna Krasnolutska, Elena Mazneva and Ewa Krukowska, Bloomberg, 10/31/2014|
MarketMinder's View: We are not saying the tensions in Ukraine are over, but the payment deal between Ukraine and Russia should help alleviate one potential concern: Russia turning off the gas to Europe because of Ukraine siphoning it for its own use.
|By Mike Segar, Quartz, 10/31/2014|
MarketMinder's View: This is a mish-mosh of non-threats, late-lagging and widely known statistics and seemingly big numbers that are taken completely out of context. Here is a chart-by-chart rundown:
Southern Europe’s Jobless Youth: Yep, unemployment among those ranging from high school sophomores to 24-year olds is high in Souther Europe. But that has been true since 2008. Why should it be frightening now? Especially when the overall figure is slowly falling?
Japan demographics. This is another widely known factor that is a false fear. Demographics move too slowly to materially affect global markets or the economy. It is a structural shift of the sort markets adapt to easily.
So this part mentions €136 billion in non-performing loans on EU bank balance sheets, but it fails to mention the eurozone banking system has assets in the tens of trillions. This is a pittance.
Student loans are up. But scale is missing here, too. According to the New York Fed’s study, median student loan debt is $12,000—roughly the size of a modest car loan. And nearly three quarters of borrowers have less than $25,000 outstanding.
Yes, the cost of college is rising fast, which is largely a government issue created by too much money chasing a relatively fixed supply of accredited universities.
China hard landing! This fear is over four years old. The bull market has continued throughout.
The Ukrainian economy’s annual output is about $175 billion, 0.2% of global GDP. The country’s annual output would make it the 27th largest state by output in the US. There are individual stocks with bigger market caps. Apple, for one, is more than three times the size of Ukrainian output. Things are not good in the Ukraine, and we can sympathize with residents impacted. But this isn’t scary for the global economy or markets.
Venezuela? Argentina? Small and widely known.
Canada’s housing market isn’t much of a scary threat to the world, and the reality is the US housing market didn’t cause the financial crisis in 2008—FAS 157 and the government’s haphazard behavior did that.
There is no deflation in Europe. There is disinflation, largely driven by falling energy prices. But also, slight deflation isn’t bad economically. See: The US industrial revolution.
Look, are there some negatives in the world? Yes. But there always are. Whether or not they should concern global investors is an entirely different question, one requiring a more sober analysis than this article provides.
|By Szu Ping Chan, The Telegraph, 10/31/2014|
MarketMinder's View: Hiiiiiighway to the danger zone! Sorry, but Kenny Loggins’ Top Gun anthem really is the only thing you should take away from this or any of the 100 or so other warnings October’s teensy uptick in eurozone inflation suggests the region still risks deep deflation. Economies and consumer price indexes are not like Air Force jets piloted by Tom Cruise and Val Kilmer in 1986. They do not need jet fuel and bursts of energy to achieve lift-off, and they don’t crash like Goose if they fail to achieve a certain velocity. Inflation is always and everywhere a monetary phenomenon. The eurozone’s money supply is growing (anemically, but growing), and banks might just be a wee bit more comfy lending now that stress tests are over. Those are not deflationary monetary conditions.
|By Matt O'Brien, The Washington Post, 10/31/2014|
MarketMinder's View: Urrrrgggghhhhh. Ok so we got a giggle out of the headline, because anyone who watched TV in the 80s fondly remembers these commercials. But that’s about the only point we can award here, because the actual analogy is juuuuuuuust a bit outside. (Sorry.) Potential GDP, as we explain in today’s commentary, is nothing more than a forward straight-line extrapolation of the average growth trend. Of course the CBO would have calculated a higher number in 2007 than today. That doesn’t mean we’ve fallen and we can’t get up! Potential GDP, you see, isn’t a ceiling or even a “where we should be.” It is just an arbitrary thing cooked up by some dude in an ivory tower one day. It has zero real-world significance—it’s an academic fairy tale and nothing more. That we’re under it today doesn’t mean the last recession made us “permanently poorer.” It just means real life has economic cycles, while that fairytale straight line doesn’t. Also? The chart, which is lifted from Harvard Economist Lawrence Summers’ commentary here, is at least six months old, because it shows the US on a downswing. Guess what! We’re on an upswing now! Actual GDP is marching closer to fairytale GDP! (Also meaningless, but still, a counterpoint is a counterpoint!)
|By Staff, EUbusiness, 10/31/2014|
MarketMinder's View: Regulators are regulators, folks. The only thing backing the ECB’s statement that its brand of regulation will be superior to national regulators is hubris. They’re all people, and people make mistakes. Having one regulator to rule them all should improve consistency in theory, but that hasn’t been tested yet—and the blueprint leaves them plenty of wiggle room to do as they see fit for whatever reason in the heat of the moment. In short: This move doesn’t crisis-proof the eurozone. As for the concerns having one institution oversee monetary and regulatory policy reduces transparency and potentially politicizes monetary policy, we too are inclined to raise a skeptical eyebrow, as we are fairly confident placing the monetary policy and regulatory committees in different buildings and having them meet at different times doesn’t amount to a firewall. People can just pick up the phone or send an email, ya know? That said, the US and UK aren’t much worse for the wear for having their central banks pull double duty.
|By Alan S. Blinder, The Wall Street Journal , 10/30/2014|
MarketMinder's View: So all the eurozone needs is Germany to stop being a stickler with the ECB’s purse strings, allow various “unconventional stimulus programs” and the region will be back on a sustainable path of economic growth? Well that’s simple! After all, we saw how fiscal and monetary stimulus returned the “economic powerhouse” label back to Japan. Errrrr. Wait. Japan remains in an economic malaise despite having the most aggressive monetary easing in the developed world and repeat fiscal stimulus. So maybe it isn’t so simple? Besides, most of the austerity in the eurozone has been incremental tax hikes, not huge spending cuts, so the German approach doesn’t really seem to be dominating the landscape. Heck, many nations missed deficit targets in recent years. We would suggest the structural reforms this article downplays plus a good solid dose of deregulation and less shifting rules around banking would probably do more over time than allowing France to spend a wee bit more.
|By Russell Gold, Erin Ailworth and Benoit Faucon, The Wall Street Journal , 10/30/2014|
MarketMinder's View: As this piece nicely illustrates, fears that falling oil prices will put the US’s spectacular energy boom at risk are overwrought, as many firms can remain profitable at even lower prices. That isn’t to say some companies aren’t feeling pain, though—smaller companies drilling in areas with higher costs may need higher prices to break even. But it will take time for that effect to be truly felt, and it seems unlikely (as of now) to really hit the US’s largest shale fields, like the Bakken and Eagle Ford. For more, see our 10/29/2014 commentary, “Falling Oil Prices: Consumers’ Boon, Producers’ Bust?”
|By Staff, The Wall Street Journal , 10/30/2014|
MarketMinder's View: Though many have extolled the Fed’s quantitative easing (QE) program as a success, this take is sensibly skeptical. For one, the Fed’s bond buying may be over, but its balance sheet isn’t about to be wound down any time soon—QE’s effects will remain for a while. And two, though some point to the US’s lower unemployment and faster economic growth compared to Europe as evidence of QE’s effectiveness, this is a misleading comparison. US growth (and hiring) actually picked up as slower bond buying became a reality. Additionally, consider these two counterpoints: Japan and the UK. Japan used QE from 2001 to 2006, and yet trailed most developed nations’ growth and market returns over that period. It is also employing it on a vast scale (relative to GDP) today, yet the economic outlook is murky at best. Second, UK growth improved after it stopped its QE program—which seemingly corroborates the US’s acceleration when tapering neared. Finally, loan growth and economic growth are slow in this cycle—which is supported by roughly a century of theory stating that the money supply and yield curve are keys to growth. QE disavowed those lessons, instead fixating on low rates to spur demand, supply be damned. All in all, QE’s negatives seem to outweigh its positives.
|By Martin Crutsinger, Associated Press, 10/30/2014|
MarketMinder's View: First, the data: Q3 US GDP rose at an annual rate of 3.5%, led by consumer spending, exports and business investment. Wheeee! But before getting too high off this growthy-sounding number, a caveat—this is the first estimate of Q3 GDP. The first estimate of Q1 2014 GDP initially showed 0.1% annual growth, but that has since been revised to a -2.1% annual contraction. Now we aren’t trying to be a wet blanket about Q3 GDP—it could get revised higher like Q2 GDP was (first estimate of 4.0% to current estimate of 4.6%). But for investors, this backward-looking figure merely confirms what stocks have already moved on—the US economy is growing nicely, a leader in the developed world.
|By Reynolds Holding, The New York Times, 10/30/2014|
MarketMinder's View: Well, we doubt it will be the perfect test, which would have to weigh costs against benefits. Fraud will and does happen, Sarbox or no. Markets dealt with that risk for generations before Sarbox passed in 2002, and the fact is fraud was already illegal. As the article sensibly notes, “One reason Sarbanes-Oxley isn’t used more often may be that it overlaps with older statutes that prosecutors are more familiar with and that have been tested in court. The reform has also pushed companies to create procedures that require low-level employees to tell chief executives or chief financial officers that financials are up to snuff. That makes it tough to prove higher-ups knew of inaccuracies.”
|By Josh Zumbrun, The Wall Street Journal, 10/30/2014|
MarketMinder's View: Here’s a fun way to see words, words, words don’t make for clearer (or better) monetary policy. Which isn’t that bad in the sense unclear and vague “Fedspeak” (as perfected by former Fed chair Alan Greenspan) keeps investors from gaming the next monetary move and doesn’t put central bankers’ credibility at risk if they decide to change their minds, which human beings tend to do. Words from the Fed often equate to obfuscation, a point investors would be well served to keep in mind.
|By Staff, The Economist, 10/30/2014|
MarketMinder's View: This article posits essentially three questions about quantitative easing’s (QE) legacy: did it work?; did it have unacceptable side effects?; was the Fed right to stop? The argument here says: yes; not really; maybe. Here are our answers: no; yes; yes. When you consider that loan growth took off after the Fed began tapering its QE program, it seems clear there may be significant unintended consequences that this article doesn’t account for. Here is a tip to interpreting monetary policy: If all the article discusses are interest rate levels, the thesis may well be off target. After all, we never questioned whether QE would be a force contributing to lower overall interest rates, just that this isn’t proof money was easy, inflation boosted and growth stimulated. Increasing the money supply would do all four of those things, but that requires banks to make loans, which QE discouraged. Yes, low rates may encourage businesses and individuals to try to borrow. However, this ignored banks’ role in the borrowing relationship—thanks to a flatter yield curve and smaller rate spread caused by QE, banks had little incentive to lend to anyone but the most creditworthy. Why take on more risk when the payoff was so little? Now then, we do agree the risks of hyperinflation and a bubble were overstated, but that is largely because this program was never stimulus in the first place.
|By Christopher Bjork, The Wall Street Journal, 10/30/2014|
MarketMinder's View: With all the negative sentiment surrounding the eurozone recently, stories like this are overlooked—Spain is estimated to have grown 0.5% q/q (2.0% annualized) in Q3, its fifth consecutive quarter of growth. This suggests reality, while not wonderful, is better than many investors believe. That gap is fuel for continued bull market ahead, as folks gain confidence when their fears don’t materialize.
|By Neil Irwin, The New York Times, 10/29/2014|
MarketMinder's View: An impressive collection of misperceived data and theories about the Fed’s quantitative easing (QE), in pictures! We’ll go chart by chart, for your convenience.
Chart 1—Fed Balance Sheet: Yep, it’s up a lot. The taper is also not going to bring it down, as they intend to reinvest maturing principal and no bonds are being sold. The discussion here is accurate.
Chart 2—Mortgage-Backed Securities: Yep, they bought ‘em.
Chart 3—Corporate Bond and Mortgage Rates: Yep, they’re down. Though, we’d note that corporate bonds have not been targeted outright by QE.
Here is where we get wackier.
Chart 4—The Cyclically Adjusted P/E Ratio (CAPE) is at Pre-Bust Levels: It is, but this has next to nothing to do with QE, is a poor measure of valuations and isn’t a timing tool for investing. Since it blends together earnings from the last decade, it’s currently more inflated by the recession’s slashing the “E” in CAPE than anything with QE. Stocks aren’t expensive by historical standards using better measures, and even if they were, they could still rise.
Chart 5: Inflation. QE, particularly QEs 2 and 3, is deflationary. It weighs on long-term interest rates, narrowing the spread between short- and long-term yields. This spread is a key determinant of banks’ lending profits. More narrow equals less profitable, and as a result, less plentiful lending. Those low rates discouraged loan supply. Without lending, the Fed is powerless to boost money supply and inflation.
Chart 6: Potential GDP and GDP: GDP is an imperfect reflection of the economy, and potential GDP is an imperfect extrapolation of the trend of this imperfect reflection. None of this is telling.
Chart 7: Jobs follow growth, growth has been slow in this cycle, in part due to QE.
Loan growth in this cycle has been the slowest of any on record. Growth has been too. That is not coincidence, and QE is partly to blame, not laud.
|By Ambrose Evans-Pritchard, The Telegraph, 10/29/2014|
MarketMinder's View: An enjoyable read, but the thesis here is off and the evidence less convincing when you put it under a finer lens. The Riksbank cut rates to zero because it seeks higher inflation, which is the primary role of most central banks the world over. They didn’t explicitly target a weaker currency, the aim of a currency war. But even if they did, you don’t win a currency war—you win and lose, because import prices rise, impacting businesses’ and consumers’ bottom lines. Finally, the notion, “The Riksbank faces an acute dilemma, forced to pick between the competing poisons of deflation or an asset boom” is great writing but off-target analysis. For one, they weren’t using rates to control housing prices (the perceived asset boom), they were using macroprudential policies (their own flavor of wrong). But that is also a false either/or. The debt to disposable income figures cited here as “jumping” from 120 percent to 175 percent over the past twelve years as evidence of the bubble amount to a compound annual growth rate of less than 2.5 percent per year. That’s it folks, 2.5 percent. Never mistake high quality wordplay employing a certain dramatic flair for fact-packed analysis.
|By Paul Vigna, The Wall Street Journal, 10/29/2014|
MarketMinder's View: Full disclosure: We are not fans of technical analysis. But this article actually just completely argues against itself, illustrating why we don’t buy into the predictive quality of lines on a page. We are told by one devotee that, “Well, those two key technical markers having been hit, there isn’t much upon which traders can key, he said. ‘They are behind us, leaving no live formations to key off of. That and support being light means that we should be prepared for the expected volatility in the day’s final two hours.’” But here is the thing: The rest of the article shows you that technical analysis didn’t foretell anything that has happened over the last two weeks or even longer. But now we’re in uncharted territory. What were we in then? Here are the facts: Technical analysis relies on devotees’ interpretation of past price levels. But stocks aren’t serially correlated, so you can never predict returns by “drawing lines on charts and extrapolating them into the future.”
|By Szu Ping Chan, The Telegraph, 10/29/2014|
MarketMinder's View: This is a “timebomb” with an exceptionally long, slow-burning wick to ignite what could be a big ol’ dud anyway. The argument is similar to the one offered in the US about the government’s “unfunded liabilities”—long-term forecasts and projections of the impact of entitlement spending on the public debt. Suffice it to say, we strongly doubt any of the forecasts here for what UK debt-to-GDP will look like in 2061 are very reliable. But even if they are, and their worst case scenario comes to pass, we’d like to point out Britain has had debt exceeding 200% of GDP before—when it had an empire the sun never set on. Japan, by the way, has 220% debt-to-GDP right now. Now Japan isn’t exactly a shining economic star, but it isn’t because of their debt—the neo-mercantilist, anti-competitive tendencies create that issue. Britain doesn’t have those factors. Besides, we’ve seen many nations reform pensions and other benefits in recent years, and there is no reason the UK couldn’t do so at any point in the next 47 years if it were necessary to avoid a potentially bad 2061.
|By Pedro Nicolaci Da Costa, The Wall Street Journal, 10/29/2014|
MarketMinder's View: Sorry, but we struggle to see why this is news at all. Of course it doesn’t end the concept. It isn’t as though the Fed is actually acknowledging the policy was wrongheaded and publicly lambasting Ben Bernanke for championing it. They are merely ending a (wrongheaded) program designed to stimulate based on the fact the recession ended 20 quarters ago. (!) But here is something to keep in your back pocket: If, and this is an if, we see a recession with deflation and the Fed launches quantitative easing, we would suggest that is a potential complication, not a benefit. Oh, and also, we are confused as to why the Fed thinks a “worst-case scenario” is one “in which the forecasts for growth and inflation were very poor and officials had already exhausted other tools to spur the economy.” We would suggest an actual deflationary depression a la the 1930s is more like the worst-cast scenario than a forecast of poor growth. And quantitative easing (QE) would not have helped then, as driving down long rates while hiking short-term rates amid an inverted yield curve isn’t likely to be a plus.
|By Matthew Boesler, Bloomberg, 10/29/2014|
MarketMinder's View: For one, no one has announced an “unwinding” of quantitative easing (QE), which would involve the Fed selling bonds on its balance sheet or not reinvesting securities when they mature. This isn’t part of the taper, it would be a separate, additional announcement. But also, this presumes QE boosted asset prices a bunch, which isn’t really proven using factors like price-to-earnings ratios, because they are only slightly above average presently. Soooooooooo? Last, if it is the effect—higher long-term interest rates—that some presume will tank stocks, why did they go up last year amid rising long rates?
|By Toru Fujioka and Keiko Ujikane, Bloomberg, 10/29/2014|
MarketMinder's View: Well, this is an upturn from recent months’ falling output. And it joins Japanese retail sales, which bounced in a report published yesterday. But it is premature to say this represents anything other than a dead cat bounce in light of April’s potential sales tax hike. After all, we just saw Japanese businesses and consumers respond to incentives rationally in late 2013/early 2014 with a rush of purchases ahead of the prior sales tax hike. A very similar factor could be at work as this year winds down, barring Abe declaring clearly that he won’t enact the second hike.
|By Robbie Whelan, The Wall Street Journal, 10/29/2014|
MarketMinder's View: A slower pace of inflows into nontraded REITs doesn’t mean “investors are backing away” from them. That would be if there were net outflows, which isn’t the case here. That being said, in our view, nontraded REITs should be a nonthing or a non-holding in your portfolio, because they are merely illiquid, high-fee and nontransparent versions of traded REITs, which are fine. Suggesting these “as bond alternatives,” as the article notes some brokers did, in our view, is a mistaken notion. The purpose of a bond in your portfolio should be to buffer against market volatility in a way you can measure, using a saleable instrument. You can’t say any of those things about nontraded REITs because you can’t, well, trade them.
|By Staff, EUbusiness, 10/29/2014|
MarketMinder's View: Well, it seems the US’s fight against individual income tax avoidance has gone global. In a new agreement, more than 80 nations (including Switzerland* after 2018) will exchange information on foreign nationals banking at institutions within their borders. This is basically an agreement in principle for a global FATCA, which basically eliminates the chance there is a big global backlash to the currently US-specific law. *Switzerland kinda sorta will join, as the article notes, its agreement to this deal was hedgy.
|By Edward Conard, The New York Times, 10/28/2014|
MarketMinder's View: Whatever your view of income distribution, let’s be clear: The wealth gap isn’t due to anything the Fed has done, which presumes low rates disproportionately benefit the wealthy, as they own more stocks and we all know low rates are good for stocks (sarcasm alert). There is no real evidence things like quantitative easing boosted stocks. But the article here raises the sound points that the Fed attempting anything with respect to the wealth gap is a bigger risk than benefit, particularly since it is far outside their mandate. Again, whatever you think of income or wealth distribution, you don’t want government agencies skewing far outside what they are legally permitted to do. Disagree? Answer this: What if the agency were controlled by someone you categorically disagree with?
|By Joe Carroll and David Wethe, Bloomberg, 10/28/2014|
MarketMinder's View: Recently, there has been a lot of debate over whether falling oil prices will hit US oil production, principally tied to shale producers. The logic here is unconventional oil production has higher costs, and therefore needs higher oil prices to retain profitability. And that is true, to an extent. However, before people jump to conclusions, we’d suggest considering the following salient points this article raises: Price swings aren’t unusual. “The oil industry already has demonstrated it can generate solid profit at lower price.” Firms are becoming more efficient. Finally, we’d note prices typically must stay low for some time to hit production. We aren’t saying they won’t, but it seems premature to presume they will right now tied to a couple months' big volatility.
|By Damian Paletta, The Wall Street Journal, 10/28/2014|
MarketMinder's View: Yes, debt is rising. And the article even provides a fun factoid to illustrate that: “That [$5 million in gifts] covered the growth of the debt for less than six minutes.” But the article completely ignores something very important when it comes to government debt—is it affordable? And it is! The US doesn’t need big donations from citizens to finance the debt, because it is plenty affordable as is. And that is a good thing, because if we were Uncle Sam, we would not bank on getting big donations from civic-minded people. As long as the government can afford interest payments on its debt and has access to markets—something unlikely to change in the foreseeable future—the debt isn’t a real risk to the economy or markets.
|By Margaret Newkirk and James Nash, Bloomberg, 10/28/2014|
MarketMinder's View: Georgia’s ports—Savannah and Brunswick—are major hubs for US import activity, and the state has been reaping benefits: "Together, the two ports contributed $32.4 billion to Georgia’s economy in 2011, or 7.8 percent of the total, according to the most recent University of Georgia study. They were responsible for 352,146 jobs, including 37,000 in Savannah’s home Chatham County." Rising imports just aren’t job or growth killers. Next time you read imports detracted from economic activity, remember this article.
|By Mark Gilbert, Bloomberg, 10/28/2014|
MarketMinder's View: Currency markets are no smarter than stock or bond markets. They are markets, and markets are markets. Period. Volatility in one is not predictive of moves in another. As an aside, the MOVE index (along with the other volatility gauges cited here) is quite flawed. Simple fact here, friends: Volatility does not predict future volatility, just as past performance does not dictate future returns. Period.
|By Kathleen Madigan, The Wall Street Journal, 10/28/2014|
MarketMinder's View: Consumer confidence surveys are a tiny snapshot of sentiment—in this case, suggesting optimism is growing—but that’s about it. They don’t predict stocks, the economy or consumer behavior since they reflect how people felt at the time they took the survey, not what they’ll actually do. And how they felt has a tendency to be impacted by recent economic news and market action. So it might be a bit of a stretch to say the reading “should be a welcome sign for retailers.”
|By Paul Davidson, USA Today, 10/28/2014|
MarketMinder's View: Speculation continues surrounding rate hike timing and the end of quantitative easing (QE). Will the Fed choose to keep the “considerable time” language intact? Heck. We don’t know. But it doesn’t really matter either way—central bankers’ speak is about as reliable as politician speak, which is to say, not reliable. Instead, we should assess their actions. And historically, the first rate hike in a tightening cycle hasn’t been materially bad for stocks. Also, all the QE / Taper Tantrum talk presumes this meeting is sneaking up on people, which it isn’t. The end of QE, should they follow through as expected by many analysts, would not be a surprise. (Nor is it a very big deal—it’s a positive step in a series of positive steps bringing deflationary, non-stimulative QE to a close.)
|By Lu Wang, Bloomberg, 10/27/2014|
MarketMinder's View: Evidently, the reason stocks have cooled is because the market has come too far, too fast relative to GDP. And while so-so growth was good enough then, the US economy will need to show far more mojo to boost stocks looking ahead. This thesis ignores a simple, fundamental truth: Stocks aren’t GDP. GDP is a rather flawed measure of total US output—private and public sector included—that does weird things like count imports (a measure of domestic demand) as a negative. Stocks are ownership slices of publicly traded companies—pure private sector. When you own a stock, you own a share in future earnings—not a future reading of one arbitrary econometric. Earnings have grown swiftly during this bull market and appear poised to keep doing so.
|By David Biller and Mario Sergio Lima, Bloomberg, 10/27/2014|
MarketMinder's View: Brazilian stocks are down big since markets realized Dilma Rousseff would likely win a second term as President, but sentiment is probably too dour. Rousseff’s recent rhetoric and actions (including replacing Finance Minister Guido Mantega) suggest she is moderating, which could provide markets some relief as her second term kicks off. She will have plenty of chances to re-earn the private sector’s confidence. The political reforms outlined here would be an incremental positive on that front, should they come to fruition.
|By E.S. Browning, The Wall Street Journal, 10/27/2014|
MarketMinder's View: The thesis here? Volatility ain’t over. Why? Stocks aren’t cheap, central bankers seem less reassuring about monetary policy, the eurozone is growing slowly—so is China—and commodity demand is slowing. But none of these are exactly new or unique fears. They are more or less the same darn fears lurking for most of this bull market. Monetary policy globally needn’t be coordinated—and that actually seems like an end of US quantitative easing fear above all else, which is and has been off target, in our view. Stocks needn’t be “cheap” to rise, or else low valuations would regularly predict returns, and they don’t. The dour discussion of global growth here is just more of the same skepticism. In our view, that folks continue to bemoan such false fears suggests pockets of skepticism remain—and the euphoria typically seen at bull market peaks is still far away.
|By Andrea Coombes, The Wall Street Journal, 10/27/2014|
MarketMinder's View: Emotions are one of the biggest detriments (or perhaps the biggest) to many investors’ reaching their retirement goals. According to prospect theory, we hate losses almost two and a half times as much as we like equivalent gains, so it is easy to see how volatility can get the better of some folks. Perspective (as in numbers one and six) is a valuable thing. Also, not getting sucked into the short-term-ism by not following every wiggle too closely or focusing on your goals (numbers two and four) is key. But when volatility is high isn’t a great time to assess risk. You have to think about trade-offs, and you should be thinking about that pretty much always in investing. You must take some measure of risk to earn a return commensurate with your goals.
|By Jeff Black and Nicholas Comfort, Bloomberg, 10/27/2014|
MarketMinder's View: Initially, 25 banks were on the ECB’s naughty list, failing to meet the new regulator’s requirements. But the data were based on information as of 12/31/2013, and as we’ve noted, banks have been stingily raising capital all year. So instead of having to come up with at least €25 billion, they must come up with only €9.5 billion over nine months to fill the shortfall. One bank accounts for half of that. That’s a drop in the bucket compared to the eurozone’s aggregated balance sheet of more than €31 trillion. All in all, the best thing we can say about these is exams is they are over. This removes one source of uncertainty and could make banks a wee bit more amenable to lending. (Though we don’t expect an explosion of loan growth in the eurozone—other headwinds, like ECB quasi-QE remain.)
|By Morgan Housel, The Wall Street Journal, 10/24/2014|
MarketMinder's View: Parts of this are a bit buy-and-holdy, and it downplays the opportunities to capitalize on trends that arise throughout the market cycle. But those wee drawbacks aside, it is a handy look at some of the ways our brains and feelings trick us. These are four lessons every investor who isn’t a robot or otherwise lacks an emotional “off” switch would benefit from learning.
|By Jason Zweig, The Wall Street Journal, 10/24/2014|
MarketMinder's View: The sciencey stuff in the first half is interesting, but probably not actionable. The second half, however, is full of good solid sense about how people err in perceiving their own ability to withstand market volatility—and what they can do about it. Why is this important? “For most investors, the most damaging risk is probably … ‘deviating from your long-term plan in pursuit of short-term emotional comfort in a time of unease.’” The four-part questionnaire at the end can help you avoid this trap.
|By Ruth Mantell, MarketWatch, 10/24/2014|
MarketMinder's View: This piece highlights an NBER paper claiming stocks do best under Republican governments but the economy does best under Democrats. This. Is. Hogwash. Stocks don’t prefer either party. Of the 13 bear markets since 1926, six started on a Democratic President’s watch and seven started under a Republican. The reason one is higher than the other is that there is an odd number. Differing economic growth rates during Democratic and Republican administrations stems from countless variables, many beyond the President’s control. Politically, we think the biggest swing factor is gridlock. When Congress can’t agree on anything, they can’t reshape property rights, regulation or the distribution of resources and capital. Stocks usually love the stability of the status quo.
|By Matt O’Brien, The Washington Post, 10/24/2014|
MarketMinder's View: No it didn’t. It just got argued, once again, which doesn’t make it remotely accurate. This time, two economists tried to model “secular stagnation” and came up with three reasons why it’s a thing and could stay a thing. Those reasons are household deleveraging, inequality and declining population growth. Let’s take a look. Households did deleverage quite a bit after the financial crisis, but borrowing bounced last year and is accelerating. Not that you need higher household borrowing and less saving to boost interest rates and boost growth—a bizarre thesis considering the paper goes on to argue we need super low rates to boost growth. (When arguments argue against themselves, they fail the logic test.) Moving to inequality, we have never seen reliable evidence it is widening. Most studies use pre-tax, pre-entitlement median household income. Which doesn’t account for a) programs created to address income gaps, b) the fact more houses are headed by singles today than 30 years ago and c) age. The household income of a 24-year-old college grad in her first job versus the household income of her parents, combined, in their prime earning years, is not inequality. It’s just life. Finally, demographic trends aren’t market drivers. Though, we’d also point out, Millennials outnumber Boomers. Japan didn’t have a lost decade because its working-age population started declining. Those economic troubles had a wee bit more to do with Japan’s structurally unsound state-sponsored neo-feudal-mercantilist economy.
|By Eunkyung Seo, Bloomberg, 10/24/2014|
MarketMinder's View: Wheeeeeeeeeee! Growth! We’d give you more analysis, but these early releases never give you much to go on—consumer spending grew, exports fell, and it’s all backward-looking. But still, whee, growth.
|By Matt Levine, Bloomberg, 10/24/2014|
MarketMinder's View: Why did the SEC reject two firms’ applications to create the first “non-transparent” actively managed ETF? (Which is sort of like your typical mutual fund, which reports holdings quarterly, except it’s also an ETF.) It largely comes down to this: They “proposed a product that was too slow, that wouldn't allow for incorporation of information into prices on a microsecond-by-microsecond basis, that wouldn't let market makers make near-risk-free profits by trading quickly in multiple markets. And the SEC said, no, that's not allowed. Modern equity markets are about speed and efficiency. If your product doesn't align with those values, you can't trade it.”
|By Szu Ping Chan, The Telegraph, 10/24/2014|
MarketMinder's View: Let’s be clear: The service sector didn’t “falter.” Growing 0.7% q/q—a 2.8% annualized rate—is not a fall, stumble or wobble. It is growth, and not of the snail-speed variety. Same goes for total GDP, which grew at the same rate. The UK is doing fine. As for all that stuff about a Q4 slowdown, it all seems a tad speculative. Though, it suggests expectations are nice and low, giving reality a fairly easy hurdle to beat.
|By Allister Heath, The Telegraph, 10/24/2014|
MarketMinder's View: There are some quite sensible nuggets here, including the headline argument that too big to fail is a myth. Markets didn’t seize in 2008 because Lehman was too big. They panicked because the government’s inconsistent, haphazard response scared the pants off people. When the government arbitrarily picks winners and losers in a crisis—forcing Lehman to go bankrupt after engineering JPMorganChase’s purchase of Bear Stearns under identical circumstances six months prior—investors and firms have no way to set expectations. Ergo, chaos. We also agree, in theory, that having credible resolution programs that allow banks to fail in an orderly manner is an ideal, market-oriented solution. We just don’t have much confidence the BoE’s plans accomplish that. The framework assumes the bank will pre-emptively identify banks on the brink and take them over before disaster hits. Ideally on a Friday. That just seems a little too rosy considering how quickly bank runs start and escalate during a panic. Washington Mutual was seized and sold on a Thursday, after a 10-day run. Things happen.
|By Floyd Norris, The New York Times, 10/24/2014|
MarketMinder's View: We’re just skeptical that the “skin in the game” rule requiring banks to own a slice of any mortgage-backed securities they create does all that much to make the banking system stronger. We’re also skeptical of the related concern here, which is that regulators’ decision to scrap down payment requirements on the high-quality mortgages exempt from the skin in the game rule somehow makes the system extra-vulnerable. Seems like everyone’s missing the elephant in the room: Fannie and Freddie didn’t go broke in 2008 because evil banks hoodwinked them into buying securitized loans the banks knew were “toxic” and were eager to dump on the poor, innocent, unsuspecting government-sponsored enterprises. They went broke because mark-to-market accounting rules were misapplied to those illiquid assets, eroding their balance sheets. The actual loan losses from the crisis were about $300 billion, and those were spread across the banking industry. Total writedowns were nearly $2 trillion. The rule was toxic, not the assets. The rule is no longer a factor, so much of this debate seems moot.
|By Staff, EUbusiness, 10/24/2014|
MarketMinder's View: This has zero market impact, but it’s fun, and it illustrates how feckless and arbitrary the EU’s deficit limits are. If Italian PM Matteo Renzi makes good on his pledges here, we’ll probably see how ironic those spending limits are, too. As for France and Italy, this entirely political, administrative debate doesn’t have much bearing on their fiscal health or economic outlook. Again, this is just fun noise.
|By Teresa Tritch, The New York Times, 10/24/2014|
MarketMinder's View: We would say the following regardless of which political ideology this article espoused, as we favor neither party and tend to see all politicians as slick self-promoters and nothing more: Beware of political opinion pieces dressed up as economic analysis. That is what this article is. An ideological rallying cry without factual support. It does not portray reality. It argues sluggish growth in 2011, 2012 and 2013 showed America’s vulnerability to events like Japan’s earthquake, the eurozone crisis and the weather. Actually, we think the fact a Japanese recession, 18 months of shrinking eurozone GDP and other obstacles couldn’t knock the US expansion off track shows just how resilient our economy is! Also it would be very bizarre for the Fed to look for “signs of real recovery” when real output passed its prior peak 12 quarters ago—recovery usually comes after, you know, a recession. Not during an expansion.
|By Joshua M. Brown, The Reformed Broker, 10/23/2014|
MarketMinder's View: While the takeaway—there is no permanent must-own stock on Wall Street—is fine, we’d suggest this is too myopic and narrow to reach big conclusions. A third of the Dow is only 10 stocks, and we’re talking about a 12-month period. Some of those stocks will be oil and commodity-oriented too. Those aren’t facing issues specific to their firm, but rather, the industry-wide headwind of falling oil prices. Sure, some others face company specific issues. But the article sourced here doesn’t prove the point. Oh and besides—the biggest firms in the world, those many would consider blue chip, have blown small caps out of the water over the last 12 months.
|By Shobhana Chandra, Bloomberg, 10/23/2014|
MarketMinder's View: The Conference Board’s US Leading Economic Index (LEI) rose 0.8% in September, with nine out of 10 indicators—led by the interest rate spread—increasing. The one negative contributor? Average consumer expectations for business conditions, which are among the most limited components in this forward-looking indicator—-surveys tell you only how folks felt on a given day. US LEI has now increased in seven of the past nine months, and no US recession has begun while LEI is rising in its 50+ year history. Huzzah!
|By Max Colchester and Tommy Stubbington, The Wall Street Journal, 10/23/2014|
MarketMinder's View: While the ECB’s much-anticipated stress test results will be made public on Sunday, banks are being notified privately today. Though it’s amusing to imagine failing banks’ reactions—we’re picturing a shamed student who has to get his report card signed by his parents—experts expect most banks to pass, considering they spent the past year deleveraging and hoarding capital in preparation for this assessment. Though we wouldn’t be surprised if a high profile name or two failed, the completion of the ECB’s stress tests is a positive development. In our view, this regulatory headwind has been the primary culprit for weak eurozone lending, which should start to improve with this uncertainty passing.
|By Max Colchester and Tommy Stubbington, The Wall Street Journal, 10/23/2014|
MarketMinder's View: While the ECB’s much-anticipated stress test results will be made public on Sunday, banks are being notified privately today. Though it’s amusing to imagine failing banks’ reactions—we’re picturing a shamed student who has to get his report card signed by his parents—experts expect most banks to pass, considering they spent the past year deleveraging and hoarding capital in preparation for this assessment. Though we wouldn’t be surprised if a high profile name or two failed, the completion of the ECB’s stress tests is a positive development. In our view, this regulatory headwind has been the primary culprit for weak eurozone lending, which should start to improve with this uncertainty passing.
|By James Titcomb, The Telegraph, 10/23/2014|
MarketMinder's View: Starting in January 2015, the BoE will deal with failing banks in a three-step process. Step one: Stabilize the firm. Freeze its stocks and bonds from trading, give it a lifeline for funding. The BoE will directly step in, move deposits to a solvent third party and/or bail-in bondholders, converting debt to equity. Step two: Restructuring, which attempts to fix the causes of failure, including firing the current executives (presumed to be to accountable for the failure). The BoE will replace them with outside selections made in roughly 48 hours (the BoE thinks it has a great Human Resources and Recruiting department). Then, the third step is resolution, in which either the bank ceases to exist or will exit liquidity support. A few questions about this plan: 1) What if the failure doesn’t happen on a timeline? All the steps here presume the bank is deemed to have failed after shares are halted from trading and an assessment is done. Then over “Resolution Weekend” new directors are selected, deposits moved, bail-ins are decided on, etc. Busy weekend! What if they don’t get that time? 2) How will they determine a failure is looming? Who’s to say the BoE’s hand-selected choices will make the best decisions? What if the failures are not exclusively the fault of management—but rather, the unintended consequence of regulatory changes, as in 2008? Or monetary decisions, like in the early 1930s? Who gets fired then?
|By Gabriele Steinhauser, The Wall Street Journal, 10/23/2014|
MarketMinder's View: Though we question the overall effectiveness of stress tests—passing one doesn’t guarantee solvency the next time banks face financial trouble, given no two crises are identical—they have definitely impacted current eurozone bank operations and strategy. This piece gives a nice rundown of the “what” and “why” behind the stress tests.
|By Matt Phillips, Quartz, 10/23/2014|
MarketMinder's View: This article shows how titles can be misleading. Now, we agree more or less with the thesis: “The US economy is really roaring forward at the moment.” But most of the data points here are pretty backward-looking (job statistics) or limited (University of Michigan consumer sentiment index). The data here mostly show past strength in lagging indicators—backward-looking numbers won’t tell you anything about where forward-looking stocks will go.
|By Editorial Staff, Bloomberg, 10/23/2014|
MarketMinder's View: We agree—it isn’t the Fed’s job to, “stop banks from making bad decisions that cost them money,” especially when the loss incurred pretty clearly didn’t represent a systemic threat. But we’d go further than that. The notion the Fed can proactively deflate bubbles or head off risks through “macroprudential regulation” disavows history. They have no such track record of expertise. The idea bad banker behavior created the crisis in 2008 isn’t accurate, in our view. To hedge against that, the Fed would probably have to spend some time analyzing the man in the mirror.
|By Alex Frangos, The Wall Street Journal, 10/23/2014|
MarketMinder's View: An intermission assumes the dramatic Hard Landing of China show was actually underway. However, the fear has circulated now for more than four years, with stocks rising the whole time. Heck, China has never grown slower than 7.3% in that time, which is pretty enviable by global standards. We don’t doubt headline writers will do their best to conjure up the drama and make it seem like China is just one slip-up away from having that long-awaited “hard-landing.” But the nonfiction tale of the world’s second-largest economy likely keeps chugging along—maybe a bit more slowly, but nowhere near cratering.
|By Staff, The Economist, 10/23/2014|
MarketMinder's View: After you read this, we suggest reading this. Neither of the two are exactly happy-go-lucky, everything-is-awesome-in-the-eurozone articles. Both are dour. But if you look at the data included there is no deflation and the economy is actually growing. For investors wondering where sentiment is, this article is prime evidence false fears are still rampant. But even if the eurozone continues floundering or actually falters, it isn’t exactly new news the eurozone is struggling. Even the alleged solutions—quantitative easing, increased German spending—are old. Look, we’re not saying the eurozone is poised to power the global economy—nor does it have to, given the current expansion has done just fine more or less without the eurozone. But if headlines proclaim a widely known, largely false fear is the “world’s biggest economic problem,” that’s just another brick in the wall of worry bull markets love to climb.
|By Jeff Reeves, MarketWatch, 10/23/2014|
MarketMinder's View: Well, we aren’t exactly pessimistic about holiday sales, but we don’t really think the stock market needs any saving. That said, this article gives us the opportunity to highlight some major misperceptions many folks have about holiday retail sales. One, retail sales is a small subset of consumer spending—equating them, as this piece does, neglects service spending. Two, consumer spending isn’t the ultimate economic driver some believe—while it composes about 70% of GDP, it’s usually a very stable aspect of growth and not the swing factor driving economic cycles. Stocks don’t need gangbusters consumer spending to rise higher. And three, lower gas prices may help some folks consume, but it also means they aren’t consuming gasoline. Money spent is more or less money spent.
|By Eric Morath and Josh Mitchell, The Wall Street Journal, 10/22/2014|
MarketMinder's View: Attention Social Security recipients: As noted in this article, you will receive a 1.7% bump in payments in the next 12 months, based on annual CPI-W! (That’s the Consumer Price Index for Urban Wage Earners and Clerical Workers, the basis for the Social Security Administration’s cost-of-living adjustments.) Huzzah? Whether you think that a paltry sum or a big windfall, it is largely based on the still-tame inflation rates experienced in many parts of the world lately. However, the thesis offered here to explain this phenomenon (slow economic growth results in tepid wage growth, which means little inflation) was debunked almost half a century ago by Milton Friedman in papers like this one. Headline inflation is being weighed down by falling commodity (energy, food, raw materials) prices. Core inflation, still slow, is being weighed down by slow loan growth, which is the result of monetary policy decisions like quantitative easing, which flattened the yield curve, reducing banks’ loan profits and, hence, their willingness to make loans. Inflation is always and everywhere a monetary phenomenon, and without loan growth, the money supply doesn’t grow.
|By David Goodman, Lucy Meakin and Ye Xie, Bloomberg, 10/22/2014|
MarketMinder's View: So the hopelessly confused theory here is that now central banks' measures target weaker currencies so they can make their trading partners’ currencies rise, and we all know a rising currency is deflationary, so this is the latest fear-morph labeled a "currency war," a splashy name. But here is the reality: Most central banks' primary function is to target inflation, avoiding deflation and hyperinflation, if successful. So isn't this round of policy making just a (misguided) attempt to do that? Second, quantitative easing hasn't proven to be very inflationary in Japan, the US or UK. Why would it be different now? Third, inflation and currency values are not one-to-one, directly related. Inflation is an absolute phenomenon, currency values are always and exclusively relative. Hence, two countries could both experience high inflation or low inflation, yet one of the two would (assuming some movement) likely have a stronger currency than the other.
|By Andrey Ostrukh, The Wall Street Journal, 10/22/2014|
MarketMinder's View: Well, we are sure the sanctions are having an impact on Russia’s economy, which reportedly grew 0.0% in September. But we would humbly suggest that oil prices are a bigger deal than the largely toothless sanctions the West has put in place. When your economy is basically a one-trick pony, and that one-trick pony faces an enormous increase in the volume of tricks from other ponies, the price that pony can fetch for its trick likely falls. That is what is happening in the oil market today, and the oil industry is much more price sensitive than volume. This means the vast majority of Russia’s budget is hamstrung.
|By Dina Gusovsky, CNBC, 10/22/2014|
MarketMinder's View: The short answer, from an economic and market perspective, is no. China cannot replace the West as an export destination for Russia, and Russia cannot replace America and the West with China. What’s more, the 30-year Gazprom deal signed between Russia and China may be denominated in yuan, but that isn’t negative for the dollar. The yuan is a non-player on the global stage in terms of transactions denominated in it or its share of foreign currency reserves. But even if it were, there is no sign that would be a real threat to the US. The British pound is alive and well, yet it pales in comparison the US dollar on the global stage. Ditto for the euro. And the yen! Moreover, not mentioned here but often connected to this reserve-currency fear, is the fear such a move would jack up interest rates on US debt. But this ignores the fact Japanese, German, French and UK rates are as low as or lower than US, and none have the primary global reserve currency. To the extent more countries can trade without converting to USD, that is an economic plus for the world. The US government doesn’t get a brokerage fee or tax on the trade, and there is a buyer and seller in every transaction. This is just a ghost story, pure and simple.
|By Matt O’Brien, The Washington Post, 10/22/2014|
MarketMinder's View: There are numerous logical flaws with basing analyses like these on median household incomes. Try these on for size: 1) The median income may not change, but the people earning the median income may dramatically shift. And in a separate study published this January, the same economist whose work is cited here found income mobility is no different today than it was 30 or 40 years ago. 2) Median household income doesn’t adjust for demographic shifts in what defines a household. 3) Wealth is not a fixed pie. What the 1% or 0.1% or 0.01% (yada) have doesn’t limit another’s ability to earn more. In our view, one should be more wary of attempts to fix income inequality than the statistic itself, which is on a shaky foundation. Oh by the way, the notion here that “the middle class doesn’t own that much in stocks” is off. Since 1999, Gallup polls have repeatedly shown more than half and often more than 60% of respondents own stocks. The stock market isn’t a white shoe club for only the superrich, it’s a retirement planning staple for many Americans.
|By Howard Gold, MarketWatch, 10/22/2014|
MarketMinder's View: Are there historical instances where the Fed has helped head off a crisis in a timely fashion? Yep—as noted here, the actions in 1987 seem appropriate, largely because tightness in financial markets was one cause of the bear that began that August. However, we feel compelled to note that neither 2012, 2011 nor 2010’s corrections ended with the Fed announcements noted here. 2012’s and 2010’s were already over (June 4 and July 5, respectively—a month or more before each of the announcements noted herein). 2011’s ended after the announcement—and Operation Twist didn’t boost money supply at all, merely changing the types of bonds bought, not the quantity. You cannot simply look to the Fed to figure out when to buy. That would have proven a disastrous strategy many times in the past, when fighting the Fed was profitable. Oh by the way, here is a more telling statistic, in our view: During the 18 months FAS 157’s Mark-to-Market Accounting was in place (October 2007 – March 2009), the S&P 500 price index fell -57%. Since the March 9, 2009 bottom—days before FAS 157’s suspension and while Congress heard testimony on the rule’s deleterious impact—the S&P is up 187%. Maybe that’s a coincidence, but we kind of doubt it. Yes, there have been blips and corrections along the way. Yet there isn’t really any sign they were anything more than sentiment-driven blips in a broader bull markets—normal, causeless, fleeting.
|By CW, The Economist, 10/22/2014|
MarketMinder's View: Sheesh, how about looking at more than one month’s (August’s) data? Doing so would show that drop in August exports came after a record high in July. Industrial output and more surged in July as well. And most economists do not see the Q2 dip as indicative of trend, because the explanation was largely warmer weather pulling forward some activity into Q1 this year. Moreover, for investors, this is all very widely known. Europe is weak? The only way you haven’t heard this tale before is if you’ve been backpacking in Antarctica for the last five years. (We don’t recommend that.)
|By Staff, Reuters, 10/22/2014|
MarketMinder's View: Well, we think they left out the word “Standards” from the article’s title, because the debate here in passing the “risk-retention rule” (aka, the skin-in-the-game rule requiring banks to hold 5% of any securitized loans on their books), the two dissenters basically argued lax lending standards were at root of the 2008 crisis. Now, we have no doubt standards swung to be too loose. And we have no doubt there were occasionally poor-quality securitized loans issued. However, neither of these individually nor the two combined are truly responsible for the downturn, as illustrated by the Fed’s profit on so-called toxic debt and the fact actual loan losses were dwarfed by mark-to-market writedowns.
|By Sophia Yan, CNN Money, 10/21/2014|
MarketMinder's View: Yes, China’s economy is growing at a slower pace (7.3% y/y in Q3). And there is a chance China might not reach its 7.5% annual growth target. Should we be concerned? Not necessarily—China is still growing at a rate most countries would love. The hard landing so many fret still isn’t here. Plus, GDP growth alone isn’t the only factor to consider—the government has also been in the process of implementing reforms, which will likely be a long-term positive for China. For more, see Joseph Wei’s 08/07/2014 commentary, “China’s Balancing Act.”
|By Simon Kennedy, Bloomberg, 10/21/2014|
MarketMinder's View: “By estimating that zero stimulus would be consistent with a 10 percent quarterly drop in equities, they calculate it takes around $200 billion from central banks each quarter to keep markets from selling off.” So by starting from the presumption that the Fed’s actions are in fact stimulus, you find that the Fed has to do a lot to prop up stocks. But the problem isn’t the math, it’s the logic on this thesis, which starts from a fallacious point. Quantitative easing (QE) hasn’t been all that great for the economy—it weighed on long-term interest rates, decreasing banks’ profit margins. Banks had less incentive to lend, which meant money supply growth was painfully slow (which means not much new money could even have leaked into stocks, to the extent that was a thing at all—we think not so much). Now, maybe slow growth is good for stocks because it keeps worries higher for longer. That is possible. But it is equally possible faster growth would have benefited stocks more. Ultimately, this looks to us like trying to explain why markets bounced back the last few days, which presumes there was a fundamental reason they fell.
|By Isaac Arnsdorf and Bradley Olson, Bloomberg, 10/21/2014|
MarketMinder's View: Oil prices have fallen as of late. But concluding that a few weeks’ long blip will cause companies to change behavior and pump less seems like an awfully big leap. Oil firms do not respond to every little wiggle in oil prices real-time—nor can they. It isn’t that easy to switch production on or off. Lastly, recent oil price swings don’t necessary result from longer-term supply and demand fundamentals—sentiment can also drive short-term volatility. Plus, we are a bit skeptical of the notion prices at $80 a barrel are below firm’s shale breakeven points.
|By Peter Eavis, The New York Times, 10/21/2014|
MarketMinder's View: A couple of high ranking Fed honchos, New York Fed President William Dudley and Fed Governor Daniel Tarullo, have launched a bit of a political campaign aiming to refine the culture of big Wall Street firms, on the belief that this could prevent illegal or unethical practices, or just outright greedy behavior that “contributed to the  financial crisis.” Tarullo separately stated that Wall Street firms can’t just apply a “Check the box” regulatory structure. The fallout if they don’t? The two implied big firms will be broken up. However, completely unaddressed was the issue of small firm behavior, like Countrywide Financial Group, which we are told wasn’t good. Or the nonpublic, small firms in the S&L crisis. They do bad things too! And what about other industries? Shall we say, break up GM due to the recall issues it faced last year? Are there cultural issues there, too? We were told it was necessary to bail out GM in 2009 because the macroeconomic fallout would be immense. Which is too big to fail in a nutshell. Our point isn’t that bankers are the Partridge Family or something, but rather, that there are baddies in every industry. Banking isn’t special. Oh and greed had nothing to do with the crisis. The accounting rule Mr. Dudley loosely identified in early 2008 did. Regulators attempting to regulate corporate culture is a rather ridiculous notion.
|By F. Landis MacKellar and Jose G. Siri, The Wall Street Journal, 10/21/2014|
MarketMinder's View: Now, there is no evidence pandemics impact stocks—stocks rose 26% during deadliest on record, the 1918 influenza outbreak. But there is also no evidence an Ebola pandemic is remotely likely, which this article does a fine job of putting into perspective: “A virus’s goal is to survive, which means infecting as many new hosts as possible. There are a number of ways to do this. One is to be highly transmissible, jumping from individual to individual through proximity or casual contact. Think influenza, which causes its hosts to spew massive numbers of infectious airborne particles. Another way is to cause only minor disease, but to remain infectious over long periods. Cold sores, for example, are caused by the herpes simplex virus and are lifelong. Ebola does neither. The period of transmission begins only after symptoms appear. There is no evidence for airborne transmission, and while sexual transmission is possible, it is not likely a major route of infection. Images of health workers in alien-looking protective gear spread fear and anxiety, but Ebola is not very contagious. Transmission requires direct contact with bodily fluids. The reason to use hazmat suits is not the probability of contagion; it is that, if you are infected, the probability of death is high.” Is it possible the illness morphs? Is it possible that impacts stocks? Yes and yes. But neither are very probable and the typical media coverage of this event isn’t helpful to the majority of investors.
|By Bob Pisani, CNBC, 10/21/2014|
MarketMinder's View: Here is one gigantic flaw of many in this piece: The market is not, in fact, “calmer”—it’s just up! The market closed moments before we typed this and it rose almost 2%. 2% up is equally as volatile as 2% down. Plus, searching for meaning in bouncy times is a fruitless exercise—market volatility is normal. Forecasting the degree of dovishness at the next Fed meeting or setting up the straw man of one big tech company’s earnings as a bellwether (and then failing to knock down said straw man) is a fruitless exercise for investors. We’d suggest ignoring the noise and just staying focused on your long-term goals and objectives.
|By Michelle Jamrisko, Bloomberg, 10/21/2014|
MarketMinder's View: Here is a little check-in on a little slice of the US economy—housing. “Sales of existing single-family homes increased 2 percent to an annual rate of 4.56 million in September from the prior month, also the fastest pace in a year. Purchases of multifamily properties—including condominiums—rose 5.2 percent to a 610,000 pace.” This comes on the heels of a rebound in multi-family and single-family housing starts in September. Taken together, housing’s recovery continues its advance, albeit unevenly. Existing home sales are a financial transaction and aren’t captured in GDP. But even if we are generous and suggest all furnishings and household goods are tied to existing and new home sales, and add their economic impact to new housing construction’s, the two account for less than 5% of US GDP. So like we said, a little check in on a little slice of the US economy.
|By Robert J. Shiller, The New York Times, 10/20/2014|
MarketMinder's View: It is not impossible that these so-called “thought viruses” could cause fears, triggering stocks to fall and consumers to cease consuming. But it is incredibly unlikely. That back drop—fear or sentiment-driven moves—is associated much more with corrections, brief blips in a bull, than bear markets or recessions. In that way, of course “secular stagnation” fears, Ebola, worries of aging populations and 2011’s debt ceiling debate can influence stocks in the short run. But absent actual fundamental truth to back them up, false fears are bullish—as reality exceeds these expectations, the previously fearful are converted and buy stocks. This is really just how the wall of worry works, and these “thought viruses” are just bricks in it. The grand irony of this is that vastly more often than not, bull markets die when investors are drunk on euphoria (dare we say, irrationally exuberant?), not when they’re fearful. Finally, one thing we did enjoy was the discussion of the fact secular stagnation was a hallmark fear of the 1940s. Sure seems like that one missed the mark! (We’re betting it’s off again now.)
|By Mitsuru Obe, The Wall Street Journal, 10/20/2014|
MarketMinder's View: Appointing two women just a month ago to his Cabinet was a big symbolic move for Prime Minister Shinzo Abe. Encouraging more female workers and executives was a plank in his “third arrow” of structural economic reforms. This is a symbolic embarrassment for him as the two cabinet members noted here are both embroiled in scandals. Though, the notion that this is a big setback for Abenomics misses the fact the entire program hasn’t taken many steps forward. If Abe intends to push through the more contentious aspects of the third arrow, he will need significant political capital. Scandals like this against a still-sputtering economy do not bode well for future reform efforts.
|By Eva Taylor and Blaise Robinson, Reuters, 10/20/2014|
MarketMinder's View: The ECB’s asset purchase program—a sort of quasi-quantitative easing (QE) program—has officially begun, with the initial purchases of eurozone covered bonds Monday. In our view, this small QE program likely flattens the yield curve, reducing banks’ profits on new loans and, as a result, their incentive to lend. This is a negative, but the program appears likely to be very small relative to the QE programs in the US, UK and Japan over the last few years. While those stymied loan growth and likely slowed the economy, none ended the bull market. We doubt this version is different. More crucially for boosting lending and eurozone growth, the ECB’s stress test results are finally due out this weekend. This, in our view, will be the more telling event for eurozone loan growth looking ahead. Having these tests out of the way—and the rumored shuttering of banks that fail—likely does more to stimulate future eurozone bank lending than anything the ECB could do at this juncture.
|By Gerald F. Seib, The Wall Street Journal, 10/20/2014|
MarketMinder's View: With just over two weeks until Election Day, polls suggest gridlock could decrease if voters do what they say right now and put more politicians seen as “compromise-friendly” in office. Now, polls, particularly those on vagaries like “bipartisan” cooperation, often mislead. We think it is likely that on a partisan basis, Congress remains divided. As to whether the people elected sing kumbaya and pass more laws, we’ll have to wait and see on that one. However, we’d note that people have decried do-nothing gridlock for years, and yet it remains. We don’t really expect a sea change and widespread handholding now. Rather, the reporting here seems more like the typical buying-in-to-campaign spin that happens ahead of midterms, something that tends to increase stocks’ nervousness before the vote. Afterwards, as it gradually becomes clear gridlock remains, stocks revel in it and rise. As an aside, for those who will bemoan gridlock if (as is likely) it continues post-election, we feel compelled to note that when it comes to the government, by no means does bipartisan mean good, compromise mean sensible or active mean better for the country. For more, see our 10/09/2014 commentary, “Voting For Gridlock.”
|By Nathaniel Popper, The New York Times, 10/20/2014|
MarketMinder's View: As investing technology continues to advance, in many cases investors continue to reap the benefits—like improved efficiency in fixed-income trading. The bond market has traditionally been a relatively opaque, shadowy market where deals are struck between big players, with high operating costs passed on to customers in the bond price they pay. Having this shift to be more electronic and less human likely improves market liquidity, efficiency and drives firms to compete on price. This seems to us like taking the positive lessons of technology’s role in reducing bid-ask spreads in equity markets and applying it to fixed income.
|By Rakteem Katakey and Debjit Chakraborty, Bloomberg, 10/20/2014|
MarketMinder's View: It seems Indian Prime Minister Narendra Modi is sticking to his campaign promises, ending a decade of fuel subsidies. While it’s a politically risky move—a market-based structure may raise oil prices for Indian voters—it’s a bullish development for Energy firms who’ve been discouraged from investing in India over the past decade, as the prices they are able to charge may not reflect the market elsewhere or be sufficient to recoup costs. It also reduces the budget pressure of a costly subsidy. While what happens from here remains to be seen, increased Energy sector investment would be a welcome development for India.
|By Nicholas Comfort, Sonia Sirletti and Macarena Munoz, Bloomberg, 10/20/2014|
MarketMinder's View: This seems about right to us: “’After the comprehensive assessment, when worries about capital levels are clarified, banks will be more open with credit,’ said Giuseppe Castagna, 55, chief executive officer of Italy’s Banca Popolare di Milano Scarl. He’s targeting annual loan growth of about 5 percent through 2016, following a 4.2 percent drop last year.”
|By Tom Randall, Bloomberg, 10/20/2014|
MarketMinder's View: Here is an interesting and thorough discussion of the impact of vast increases in world oil supply on producers’ profits from various regions. Oil projects vary greatly in complexity, which means oil price fluctuations could cause some to actually run in the red sooner than others. Here is an example from Brazil. The big increase in oil supply does threaten profit growth at oil firms worldwide, including those in the US. This is one key reason why the shale revolution is bullish for the world, but not necessarily for every sector in the world. Energy is one of those it doesn’t favor. As an aside, lower priced oil isn’t really stimulus for the global economy. A dollar spent on oil goes to an oil firm, which then pays people, buys equipment and so on. Spending on Energy is no different than spending on anything else.
|By Brett Arends, The Wall Street Journal, 10/17/2014|
MarketMinder's View: Yep. Asset allocation is fundamental to long-term portfolio return. But after the mix of stocks, bonds, cash and other securities you use, in our view, the next most impactful thing is the category of those securities you pick. Valuations, including the Cyclically Adjusted Price-to-Earnings ratio (CAPE), aren’t long-term return drivers. They aren’t predictive of cycles or long-run returns, as illustrated by the 1990s—CAPE was above 20 as early as 1992 then. It was at the present level as early as 1996. CAPE was also above-average for pretty much all of the 1960s. While most P/Es illustrate sentiment, the CAPE is too distorted to even accomplish that. Because it mixes in earnings a decade old, the figure wraps in data that may be a full cycle behind. Many CAPE apologists excuse this by claiming it adjusts corporate results for economic cycles. But this is a statement that doesn’t pass the logic test: Stocks and corporate earnings are inherently tied to economic cycles. The macroeconomic picture matters a whole lot for individual company results, and ignoring this factor is a big mistake.
|By Ian Talley, The Wall Street Journal, 10/17/2014|
MarketMinder's View: The next time someone tries telling you the myth that foreigners are going to shun our debt or dump our debt or whatever, take a look at the actual data. Despite volatility over time, foreign demand for US debt is running high. How else can you see this more broadly? Interest rates, which are historically low today. Oh, and when they inevitably bring up the risk that foreigners fire sell those assets, ask them to consider two points: 1) Who are they selling to? For every seller, there is a buyer. And 2) It is highly unlikely some foreign nation is going to blow out a huge chunk of their foreign reserves desperately, which would probably cause them to take a loss. That is what we call, “Shooting thyself in thine foot.” (Not sure why we went all olde English, but you get the drift.)
|By Matt Levine, Bloomberg, 10/17/2014|
MarketMinder's View: The SEC has its first high-frequency trading prosecution win, and it seems justifiable to us. But this entertaining article highlights a few really sensible points on its road to wisely concluding, “The lesson here is something like: There are manipulative strategies, and there are good strategies, and it is not easy to tell them apart. You can tell them apart, probably, but you need to understand their purposes first. And dumb e-mails and nicknames can be a big help.” Aside from interesting and humorous, the discussion of a market maker’s role is top notch.
|By Juliet Chung and Vipal Monga, The Wall Street Journal, 10/17/2014|
MarketMinder's View: The ECB’s negative deposit rate was ostensibly put in place to spur lending—which the eurozone could truly use, given trillions worth of bank deleveraging the last few years. But merely penalizing banks for holding excess reserves doesn’t incent lending. It might incent holding something else (like government bonds). And when those plunge to negative short-term rates (likely partly as a result), then those for-profit banks likely just whack consumers, passing on costs in a tried and true capitalist practice. Now, the depositors paying this charge are presently large depositors (above €10 million), hedge funds, large businesses and the like, but their response is worth watching, too. All this highlights the fact that when you tell banks they could be shut if they don’t have big capital in a rather arbitrary stress test—as the ECB has—they will find ways to hold that capital. What banks really need to start lending is for stress tests to conclude and the cloud of regulatory uncertainty to clear.
|By Chiara Vasarri and Andre Tartar, Bloomberg, 10/17/2014|
MarketMinder's View: The lack of structural reforms—specifically regarding employment—has plagued Italy’s economy for some time. This is very early in the process and details still need to be ironed out, but if Italian Prime Minister Matteo Renzi manages to enact even incremental reforms it would be a positive step for Italy. Since most investors currently seem to consider Italy a political and economic quagmire, even modest moves could provide a positive surprise, boosting stocks.
|By Leslie Shaffer, CNBC, 10/17/2014|
MarketMinder's View: A few things here. No one—not even nonvoting FOMC member James Bullard—can forecast the Fed’s moves. And two, there is just so much evidence by now that listening to Fed words about what they may, might or even will do in the future is a complete waste of investors’ time. Fedspeak = marketing spin. For more, see our 10/17/2014 commentary “Did a Fed Waffle Cause Thursday’s Rebound?”
|By Staff, Reuters, 10/17/2014|
MarketMinder's View: After quietly injecting roughly $81 billion into China’s five biggest banks last month, China is adding more stimulus as it continues trying to balance its reform efforts and continued growth to placate the masses. China has been fairly successful at balancing the two thus far, and there are few signs this changes. So long as that is the case, China likely doesn’t see a hard landing. For more, see Joseph Wei’s 8/7/2014 commentary, “China’s Balancing Act.”
|By Brian Sozzi, The Street, 10/17/2014|
MarketMinder's View: Ummmm. It is incredibly unlikely Ebola has any measurable economic impact. It is a tragedy in West Africa and for those impacted elsewhere. But there is just no evidence, ever, of a pandemic causing major economic or market troubles. Citing what retailers did in isolation in the last month doesn’t capture Ebola’s pure impact, because markets generally have been swaying. Citing what they did in February – March 2003, while SARS broke out, also doesn’t tell you anything, because that was also when the US was invading Iraq. Heck, as the article notes, SARS cases popped up through July. Stocks and the economy rose. Finally, as this very article says, no company they contacted referenced any reaction to Ebola. Bird flu. SARS. Even the 1918 Spanish flu didn’t derail growth or the economy. Maybe, just maybe, the Black Plague did. But that was also before capitalism, medicine, hand-washing, the Industrial Revolution and the invention of stock markets.
|By Steve Matthews, Bloomberg, 10/16/2014|
MarketMinder's View: Some have credited St. Louis Fed President James Bullard with stabilizing markets today due to his comments that the Fed should consider holding off on ending its quantitative easing (QE) program—on pace to wrap up at the end of the month. And maybe so, but it is frankly more a sign of investors searching for some hidden meaning in bouncy times than anything else. Here’s why: Bullard isn’t a voting member of the FOMC in 2014. All he can do is pitch Yellen and Co. his plan. And though we’ve said this many times already, it bears repeating: the sooner the QE ends, the better. The Fed’s bond buying flattened the yield curve, disincentivizing banks from lending—and denying small firms access to credit to grow their business. Finally, we are talking about $15 billion in bond buying for effectively one month (November, as Bullard suggested they reconsider in December.) While we would gladly take $15 billion to use at our discretion (moohoohahahahaha!), it is a pittance relative to the economy or markets. (We would also point out that this is anecdotal evidence of why we don’t lend much credence to the Fed’s forward guidance. As we have often said, words aren’t set in stone, and Fed people change their minds.)
|By Richard Barley, The Wall Street Journal , 10/16/2014|
MarketMinder's View: Political instability. A bloated public sector. Stalled reforms. High debt. High unemployment and a cratering economy. That has been the case in Greece for years. Nothing changed when Greece returned to debt markets in April. But we have a few questions about the thesis this is so problematic: One, if Greece manages to exit the ECB/EU/IMF troika bailout, wouldn’t that be a positive sign of improvement? Remember, they said they needed it to keep Greece’s economy from totally imploding. Two, if they don’t exit and instead remain in the IMF’s bailout program, isn’t that the same scenario we’ve had for four long years of bull market? And three, the Fed has been tapering quantitative easing bond purchases all year. The amount by which they’ve increased their balance sheet isn’t set to change—it just won’t increase much. So why does this suddenly matter now? Why not last December, when the taper became reality? And four, if this is such a general problem, why on earth are Spanish yields hovering near record lows? Or Italian? Or Irish? Portugal’s yields are up some, but they’re still only at 3.5%—at this time last year they were at 6.3%. While the region still faces challenges, reality likely exceeds extremely dour sentiment. For more, see our 10/15/2014 commentary, “Return of the Euro Crisis’ Ghosts.”
|By Mohamed A. El-Erian, Bloomberg, 10/16/2014|
MarketMinder's View: In one sense, this is correct—with two weeks to go, October isn’t over yet. But trying to forecast or game short-term volatility is a pointless endeavor for long-term investors. While pundits search for a culprit (like central bankers, hedge fund managers or the time of the year) markets can be volatile for any reason—or none at all! As trying as negative volatility can be, investors would be best served to remain disciplined and tune out the noise. For more, see our 10/10/2014 commentary, “Putting Stocks’ Zigzags in Broader Perspective.”
|By Lorraine Woellert, Bloomberg, 10/16/2014|
MarketMinder's View: During volatile periods, it can be hard to notice any positive news. Here is one such item, an economic data point that beat every single estimate. While it’s only one such data point, it is still worth noting given the sentiment backdrop. Enjoy.
|By Neil Irwin, New York Times, 10/16/2014|
MarketMinder's View: Yes, stocks are forward-looking and do tend to presage future economic movements. But they have never been shown to be tied to the rate of GDP growth or anything associated with wage growth. And besides, if we are to assume markets are now efficiently discounting future economic conditions, then are we to assume the slow economic and wage growth are really such a shock? Those two topics have only dominated headlines for much of the last few years. The reality: While equity markets are forward-looking and efficiently discount widely known information, they can also be very volatile in the short term. They are not perfectly rational. Most small moves have little major “meaning.” Trying to pinpoint why stocks are up or down on any given day, week or month is an exercise in futility. With broader leading indicators, like the Conference Board’s Leading Economic Index, high and rising, the US looks poised to continue growing, providing a solid backdrop for the bull to keep on running.
|By Staff, Dow Jones Newswires, 10/16/2014|
MarketMinder's View: So this is a very narrow gauge of manufacturing in the Philadelphia region, and it isn’t necessarily indicative of broad economic conditions. But we note this still-growing indicator with accelerating new orders because during yesterday’s volatility some noted a similarly narrow gauge’s plunge (the Empire State Survey) was a sign of gloom to come.
|By Andrew Critchlow, The Telegraph, 10/16/2014|
MarketMinder's View: If you ask 17 people for an opinion, you’ll likely get 17 different answers—that’s kind of how humans are. (And central bankers are decidedly human, with all the biases and limitations people have.) And yep, the further from today you go, the less certainty anyone has. So of course average Joe has no hope of forecasting future rate hikes, but that is not terrifying, it has been the case since always and forever. The only new thing is that the Fed now publishes the dot plot of forecasts. Plus, broadly speaking, we don’t need any one class of people—central bankers, politicians, etc.—to solve the biggest problems in the world. Somehow, markets (and the people that compose them) tend to find solutions that work.
|By Simon Kennedy and Greg Quinn, Bloomberg, 10/15/2014|
MarketMinder's View: The media is all over the map in its efforts to find meaning in oil’s sharp downturn. In this episode, folks claim central bankers will struggle to deal with it because it is dis- or deflationary. Which it is! But there is little central bankers are going to be able to do to counter a sentiment-driven move against a backdrop of a market in which supply growth has outstripped demand growth. Also this article from yesterday highlights a contrary theme: Falling oil prices will boost consumption elsewhere. The reality is that neither of these are really quite correct. Spending on oil is spending, and mild, energy-price driven deflation hasn’t be shown by historical evidence to be a drag on growth either.
|By Jeff Cox, CNBC, 10/15/2014|
MarketMinder's View: Perhaps volatility will be higher looking forward than the relative calm we’ve seen recently. Perhaps not. Volatility doesn’t predict volatility or directionality. But here is something we can say: The reasons alluded to here as causing this dip are actually just merely widely known, long chewed over concerns that really don’t amount to much. Ebola is not an economic or market issue, pure and simple. But the theory this is driven by the end of QE has big holes. That’s been basically telegraphed for some time, yet the volatility didn’t begin until very recently. Markets—as they did with the end of QE in 2013—move ahead of anticipated events.
|By Joshua M. Brown, The Reformed Broker, 10/15/2014|
MarketMinder's View: We disagree on the importance of the 200-day moving average in the sense that we don’t believe past price movement predicts anything, no matter how charted, blended or averaged. However, we agree there has been a rotation—and that a major part is the narrower breadth of leadership. In our view, though, history shows pretty plainly this is a repeat feature of bull markets that can last for years. To us, also, 2013 wasn’t that unusual. Consider: the period December 1994 – July 1996 saw no corrections, big positive returns and no breaks below the 200-day moving average. After a brief blip under the 200-day moving average, it surged anew all the way through August 1998’s correction. Breadth fell for much of this period. The bull market didn’t end until March 24, 2000, amid euphoria we don’t see today. Enjoy this chart.
|By Thomas Friedman, The New York Times, 10/15/2014|
MarketMinder's View: This is exactly the type of analysis investors should avoid. It looks at recent price movements, sees them through a purely geopolitical lens and draws conclusions there is no actual evidence to support. Syria, noted here as an oil producer, produced 400,000 barrels of oil per day in 2010 (before the civil war). That represents about 4.5% of US daily production. It is down to basically zero now. But the other nations cited here aren’t. Libya is coming back on line of late, adding to supply, not restricting it. Nigeria likewise has increased production. The Saudis ramped up production earlier to offset the crimp from these nations. They just haven’t brought it back down yet. Moreover, this presumes the Saudis are also intentionally targeting many of the other members of OPEC, considering places like Venezuela have little ability to actual ramp output up. We just don’t think it is wise to draw speculative conclusions about market manipulation targeting foreign regimes when in fact the answer may just be the fact is that oil companies and nations take time to alter production. Volatility in oil prices happens on a moment by moment basis. The author is clearly correct that this isn’t good for petrodictators like Venezuela’s Maduro and Russia’s Putin, but frankly, we didn’t need all the speculation about oil tanker foreign policy (foreign policy being enforced at the end of an oil barrel?) to get there.
|By Lukanyo Mnyanda, Bloomberg, 10/15/2014|
MarketMinder's View: Tell us if you’ve heard this one before: A Greek government that just emerged from a confidence vote is at loggerheads with the EU over plans involving the troika’s bailout of the formerly Ottoman nation, and yields are rising as a result. This situation has recurred a host of times over the past few years, none threatening the bull market. By the way, the notion Greek fears have thus far driven up peripheral 10-year yields recently is based on a 10 basis point move in Italian yields and a five basis point move in Spanish yields. Both those are currently at 2.39% and 2.10% respectively. Spain’s low yields are eight basis points above their record low. Fears over Greece seem even more feckless in this, their umpteenth time taking headlines.
|By John Nyaradi, MarketWatch, 10/15/2014|
MarketMinder's View: These supposed signals—the 200-day moving average, an odd breadth measure, CAPE, Tobin’s Q, the so-called Warren Buffett Indicator (market cap to GDP), and falling interest rates—are of questionable value. As is the buy recommendation at the end, which is based on calendar cycles. All in all, we’d suggest merely staying cool amid what appears to either be an official correction or merely some uncomfortable volatility.
|By Unni Krishnan, Bloomberg, 10/15/2014|
MarketMinder's View: If Prime Minister Narendra Modi’s BJP party manages to wrest power from the Congress party at the state level, that could bode well for the implementation of broader reforms. India’s decentralized government structure often stymies government attempts at reform. This aside, Modi has taken some positive steps of late, particularly announcing a plan to grant the Reserve Bank of India further independence and a price-stability mandate. If enacted, that would represent a solidly positive step. Should the state elections go Modi’s way, the backdrop would be set up well for further reforms.
|By Lawrence Lewitinn, Yahoo! Finance, 10/14/2014|
MarketMinder's View: The chart shows the current S&P 500 price level broke through a 200-day average of the S&P 500’s price level. Which is supposedly a technical indicator of more pain to come, like it was in November 2012. Errr. Wait. November 2012 was neither a correction nor the start of a bear, and this “signal” came weeks before a stellar 2013 kicked off. The same happened at near the bottom of the June 2012 sell off. There are others in this bull. All this technical indicator tells us is that stocks are down NOW, not where they’re headed. As for the part on “negative fundamentals”—earnings growth just doesn’t appear to be “unsustainable.” After all, revenues have been driving earnings growth for quite some time (revenues have increased in all but two quarters since Q4 2009). Enjoy this chart instead.
|By Shawn Langlois and Sue Chang, MarketWatch, 10/14/2014|
|By Paul Vigna, The Wall Street Journal, 10/14/2014|
MarketMinder's View: This is revisionist history. The argument here is that the recent volatility is tied to the withdrawal of the Fed’s quantitative easing (QE), which we are told amounted to yanking the punch bowl. Leaving aside that this completely gets backwards what QE actually did, the article fails to explain why low rates during QE meant punch bowl and lower rates today mean we’re all sobering up to a hangover. The point of QE was to lower rates to spur borrowing and boost inflation. (It didn’t—and wouldn’t—work because QE actually flattens the yield curve, stymying loan creation.) But the theory QE tapering—presumed here to be tightening—is responsible for the volatility almost requires higher rates or some sign of increasingly tight conditions, which are absent. To those who get the century of economic theory called, “The Quantity Theory of Money,” it is little surprise there is more evidence of looser credit in recent months. Maybe, just maybe, volatility—rates, stock prices, etc.—is just darn volatile sometimes?
|By Matt Moffett, The Wall Street Journal, 10/14/2014|
MarketMinder's View: Two weeks ago, Spain’s highest court shot down the planned November Catalan independence referendum. The government dare not violate this ruling, as it could result in indictments of officials. So now Catalan Regional President Artur Mas is pledging to move forward with the region’s independence vote by implementing a “revised process.” That revised process basically amounts to a dog-and-pony show and it’s being downplayed by both pro- and anti-independence factions as little more than a glorified opinion poll. They can’t even access voter registration records, held by the government! They don’t know who can legally vote! If the earlier referendum was “nonbinding,” this one is near non-existent.
|By David Wilson, Bloomberg, 10/14/2014|
MarketMinder's View: But the VIX—using options prices to forecast implied S&P 500 volatility over the subsequent 30 days—doesn’t have the best track record of predicting future market returns. And even if it suggests a certain level of market volatility in the next month—it doesn’t tell us the direction (up or down) of that volatility. Further, the VIX is ultra-short-term focused—an unpredictable horizon and a focus that can lead to significant costs if an investor’s timing is off. So we advise to nix the VIX—and stay focused on the long term.
|By Monica Houston-Waesch, MarketWatch, 10/14/2014|
MarketMinder's View: It’s not surprising ZEW Institute’s German economic confidence survey has continued to fall—it reflects how people felt at a specific moment in time about recent economic data and stock market data. Lately, German reads and stock results have been volatile. But like all other confidence surveys, ZEW’s doesn’t predict future market returns or what people will actually do. Confidence, according to ZEW, fell for much of 2012.The MSCI Germany still jumped nearly 30% that year.
|By Shobhana Chandra, Bloomberg, 10/14/2014|
MarketMinder's View: Hey look, we’re bullish despite the recent volatility. And we believe US stocks should perform quite well over the next few quarters at least. And we believe China and eurozone concerns are vastly overblown. But the factors cited here have next to nothing to do with it. These presume all of the following: That unemployment is a leading indicator for consumption; falling gas prices correlate with increasing spending (and we guess, rising with falling?); and low interest rates will spur spending. Consumer spending is simply not a highly variable part of the US economy. None of the factors here insulate us from global risks, the fact those risks are old or false is the reason we think they won’t take down the US.
|By Pedro Nicolaci da Costa, The Wall Street Journal, 10/14/2014|
MarketMinder's View: This seems pretty sensible to us: “The gradual but rising international use of the Chinese yuan is a natural development, given the size of China’s economy and its widespread commercial ties with other nations, John Williams, president of the Federal Reserve Bank of San Francisco, said on Saturday.” But, as mentioned here, the yuan still has a ways to go—it’s lacking “the type of full flexibility required to become more widely used internationally”—considering all of the country’s existing capital controls. In all likelihood, this is a decades-long process, not days, months or even years.
|By E.S. Browning, The Wall Street Journal, 10/13/2014|
MarketMinder's View: If you’re looking for evidence ongoing volatility (probably) isn’t the start of a bear market, here you go. At a true euphoric peak, this piece would be full of analysts screaming “BUYING OPPORTUNITY! STOCKS CAN’T GO DOWN EVER!” Instead, it’s all stocks are 20% overvalued, and we’re in for a crash before the market slowly crawls higher, and the Fed made everything weird, and even if we don’t get a bear market it’ll be ugly. We think this is all rather too dour, mind you, as it overlooks the many strong positives supporting this bull market, but it’s a sentiment indicator nonetheless. Oh, by the way, public service message: Valuations aren’t predictive and other than that wacky CAPE, they aren’t stretched.
|By Paul Krugman, The New York Times, 10/13/2014|
MarketMinder's View: In arguing the world can’t fully recover from the financial crisis without widespread debt forgiveness, this piece overlooks some obvious evidence refuting its claim. Like the fact the US grew its way out of the massive debt pile-on that funded the war effort in the early 1940s. Most of that was never paid off, never forgiven, and compounded over the next 70 years. And we added plenty more debt along the way. But debt-to-GDP is way under the 106% seen in 1946, because debt isn’t inherently an economic drag. It is true slower-than-usual inflation has made it harder for consumers to reduce the relative value of interest payments, but deflationary monetary policy (quantitative easing) has far more to do with that than the continued existence of debt itself.
|By Michael P. Regan, Bloomberg, 10/13/2014|
MarketMinder's View: To us, “What is causing market volatility?” is the wrong question. Pullbacks and even corrections (quick drops of -10% or greater) often have no discernible cause. The right question: “Is there an identifiable, fundamental reason stocks should be down and fall further?” If so, that would be a strong indication a bear market is forming—but we don’t see anything like that today. Sentiment is behind economic reality, not ahead of it. Today’s risks are of the years-old, widely discussed variety. It usually takes new, surprising negatives with the power to knock a few trillion off global growth or trade to cause a bear market. Nothing today fits the bill, as far as we can see.
|By Tara Siegel Bernard, The New York Times, 10/13/2014|
MarketMinder's View: We guess this highlights some of the key differences between the suitability standard (the regulatory code for brokers) and the fiduciary standard (the regulatory code for registered investment advisers), and it shows how the industry has created confusion on this front by blurring the line between investment sales and service (like brokers hanging them out as “advisors,” with an “o”). But it is also chock full of misperceptions. Like, it says the fiduciary standard requires advisers to recommend the lowest-cost product—NEWSFLASH: If an adviser believes a high-cost product is best for their client, they can recommend it and be on the right side of the law. It also implies fiduciaries can’t sell shady products like variable annuities, but if an adviser has a reasonable basis to believe, based on their understanding of the industry, that a variable annuity is best for their client, they can recommend it and be on the right side of the law. Also, the fiduciary standard doesn’t guarantee you get advice that truly puts you first. And it doesn’t do anything at all to ensure the adviser knows how to put you first. It merely requires advisers to disclose conflicts of interest. In other words: Full due diligence requires more than asking, “Are you a fiduciary?” (Full disclosure: Our parent company, Fisher Investments, is subject to the fiduciary standard as a Registered Investment Adviser.)
|By Hernando de Soto, The Wall Street Journal, 10/13/2014|
MarketMinder's View: This article is devoid of market impact, but it is a fascinating discussion we thought we’d share either way. Sometimes people call us naïve dreamers for believing economic (and personal) freedom, property rights and capitalism can bring divided third-world countries from darkness into light, but as this firsthand account shows, these dreams have become reality in places like Peru. Whatever your ideology and political leanings, we hope the good statesman’s words here will spark hope: “All too often, the way that Westerners think about the world’s poor closes their eyes to reality on the ground. In the Middle East and North Africa, it turns out, legions of aspiring entrepreneurs are doing everything they can, against long odds, to claw their way into the middle class. And that is true across all of the world’s regions, peoples and faiths. Economic aspirations trump the overhyped ‘cultural gaps’ so often invoked to rationalize inaction. As countries from China to Peru to Botswana have proved in recent years, poor people can adapt quickly when given a framework of modern rules for property and capital. The trick is to start. We must remember that, throughout history, capitalism has been created by those who were once poor. I can tell you firsthand that terrorist leaders are very different from their recruits. The radical leaders whom I encountered in Peru were generally murderous, coldblooded, tactical planners with unwavering ambitions to seize control of the government. Most of their sympathizers and would-be recruits, by contrast, would rather have been legal economic agents, creating better lives for themselves and their families. The best way to end terrorist violence is to make sure that the twisted calls of terrorist leaders fall on deaf ears.”
|By Ben Wright and Peter Spence, The Telegraph, 10/13/2014|
MarketMinder's View: We aren’t gonna lie, we were kinda hoping this would be a chart revealing a huge bacon supply glut, and saying the world economy would be doomed unless we all joined up and ate our way back to normal. (We would happily do our part for the world if this were the case. We also would like to hear what sort of “Heal the World Through Bacon” charity record Bob Geldof would write.) Alas, however, it is a chart of the ECB’s preferred “inflation expectations” gauge, which apparently shows the market believes eurozone inflation will be at—wait for it!—1.8% y/y in five to 10 years. And this somehow indicates the Continent is teetering ever more on the edge of that dismal deflation death trap. A couple of things about this: One, slow inflation isn’t deflation. Two, slow inflation does not automatically beget deflation. Three, the money supply is growing. Four, deflation, should it happen, isn’t a self-fulfilling prophesy. Deflation was a symptom of Japan’s deep economic problems during the last couple decades, not the cause. And five, let’s just see what things look like once the stress tests are done and banks have more freedom to lend again.
|By Mohamed A. El-Erian, Bloomberg, 10/13/2014|
MarketMinder's View: The real challenge? Finding the non-data-mined, unbiased part of this article. We mean, adding up the absolute value of each Dow Jones Industrial Average daily price movement during this month, then comparing the total to the size of the index, and calling it big scary volatility that only the Fed can prevent from turning into a crash? That strikes us as an odd shenanigan at best. Here are some simple truths to help put your mind at ease and overcome this challenge: 1) Markets are always bouncy, and sometimes those bounces are more extreme than others. Perhaps this ends up being one of those extreme bouncy times known as a bull market correction, where stocks quickly drop -10% or more, then bounce much higher. 2) Fed policy has been a negative since 2008 and chased very little (if any) money into stocks. Demand isn’t artificially buoyed by near-zero interest rates or quantitative easing. 3) We don’t need a massive flood of “cash on the sidelines” to enter stocks and push up prices. We just need investors willing to pay more today for a share of future earnings. These could be new investors or folks flipping from one corner of the stock market (maybe small caps) to another (maybe big caps). 4) Commodity markets don’t trade any more rationally than stock markets, and they aren’t leading indicators for the stock market. They’re influenced by their own supply and demand fundamentals, and lately, several commodities are dealing with supply gluts. 5) If the bull market could survive six quarters of shrinking eurozone GDP, it can likely weather this latest wobble.
|By Jeremy Warner, The Telegraph, 10/13/2014|
MarketMinder's View: The “how” here sums up as “by growing anemically and unevenly,” and we’re given all manner of supposed evidence (falling oil prices and volatile stock markets, to name two) to prove it. But here’s the thing: If eurozone GDP could contract for 18 months straight without killing the global expansion or bull market, why should lackluster growth be catastrophic for the world? The MSCI World Index rose 34% during that stretch (Q4 2011 – Q1 2013). Reality exceeded dire expectations then, and we think it does the same looking ahead.
|By Jacob M. Schlesinger, The Wall Street Journal, 10/13/2014|
MarketMinder's View: Resonate, they claim, because Japan is the first “aging” country to reach the crossroads of do we pay down debt now before everyone gets too old, or do we let it ride so we can grow now. This is a false choice. There is no such thing as a “debt-demographics ditch.” Callous as this sounds, social programs aren’t contracts—they’re legislation, and legislation can change. Or Japan can roll back its huge state, putting more economic growth in the hands of its many, many businesses, freeing up state funds for retirement benefits. Or things could happen to render those very long-term demographic forecasts moot. Or Prime Minister Shinzo Abe could finally see his reform agenda through, and Japan could grow its way out of that 220% of GDP debt load. Whatever the outcome, this issue is years to decades away, not a market driver within the foreseeable future—for Japan or any of the countries allegedly watching its next move with bated breath. What matters today is whether debt is affordable. Japan has some of the world’s lowest borrowing costs, and we are fairly certain this isn’t because they hiked the sales tax in April and might do it again next year. Interest rates were rock-bottom well before the sales tax hike entered the conversation.
|By Matt O’Brien, The Washington Post, 10/13/2014|
MarketMinder's View: What austerity? Total government spending is up sharply versus pre-recession levels. And it hasn’t retreated: Those $2.1 trillion in “cuts over the next decade” are cuts to projected spending increases. Spending will still rise, just by less, and if that all hasn’t happened yet then how can it impact growth in the here and now? The government’s contribution to GDP, which doesn’t include transfer payments, is down, but this piece ignores the elephant in the room: What if that just shifted investment opportunities to the private sector? And what if the “multiplier” on private investment is every bit as high—if not higher—than on government investment? If you want a culprit for slow growth during this expansion, we think your ire is better directed at the Fed.
|By Sam Schnechner and Lisa Fleisher, The Wall Street Journal, 10/13/2014|
MarketMinder's View: Ok, let’s all set aside our personal views on the moral rightness or wrongness of companies’ taking advantage of Ireland’s favorable tax provisions, and let’s zero in on what matter for investors—particularly owners of impacted companies’ stock. On the one hand, if the so-called Double Irish goes away as rumored, companies will lose a cash-management strategy and see their tax bills rise, which could dent earnings a wee bit. On the other, if the widely expected three-to-seven year phase-in is reality, they’ll have a long time to plan, and markets will have a long time to digest the change.
|By Jason Zweig, The Wall Street Journal, 10/10/2014|
MarketMinder's View: Prof. Shiller, if you aren’t aware, is half of the braintrust behind the cyclically adjusted P/E ratio, better known as CAPE. CAPE is currently at 26—a level Prof. Shiller theorized was “worrisome” and a sign of “irrational exuberance” in a recent op-ed. And yet: “If only things were that simple, Prof. Shilller says. ‘The market is supposed to estimate the value of earnings,’ he explains, ‘but the value of the earnings depends on people’s perception of what they can sell it again for’ to other investors. So the long-term average is ‘highly psychological,’ he says. ‘You can’t derive what it should be.’ … Today’s level ‘might be high relative to history,’ Prof. Shiller says, ‘but how do we know that history hasn’t changed?’ … Today’s level, Prof. Shiller argues, isn’t extreme enough to justify a strong conclusion. So, he says, he and his wife still have about 50% of their portfolio in stocks.” Look, we aren’t trying to play “gotcha!” here. But that even CAPE’s architect waffles over what it means tells you how little use this figure is in forecasting cyclical peaks and troughs. Which sort of makes sense, when you think about it, considering it was initially designed to do the impossible, forecast returns over the next decade—it wasn’t and isn’t ever a timing tool. There are many things to watch in this “wild” (but in reality really normal) market, but CAPE isn’t one of them.
|By Jeremy Warner, The Telegraph, 10/10/2014|
MarketMinder's View: We are going to set aside all the humanitarian issues here for a moment, because on those grounds, how could anyone disagree with calls for a global response? Our beef here is solely with the thesis that fear of a global pandemic has “deeply negative economic consequences.” Swine flu didn’t cause a recession in 2009. Bird flu fears contributed to a stock market correction in 2006, but markets soon bounced and the economy didn’t retreat. SARS didn’t wreak economic havoc in 2003. The only Asian Flu that rocked markets in 1998 was the metaphorical one (a currency crisis), not the actual one. Even Spanish flu, which caused massive casualties after World War I, did not cause an economic crisis—stocks rose that year, 1918, even though a third of the world’s population perished. We realize this all sounds callous, but facts are facts, and the fact is basing investment decisions on the belief Ebola will derail the world economy is probably unwise.
|By Jack Ewing, The New York Times, 10/10/2014|
MarketMinder's View: Well on the bright side, the last time regulators arbitrarily decided to close a big bank on a Sunday, they didn’t bother sending a save the date card two weeks in advance. We guess this is more courteous? Anyway. While there has been talk that some banks could be wound down for failing these exercises, we don’t think this is enough of a potential negative to derail the bull market. The ECB has stated they will provide failing banks a notice before the results are publicized, allowing them to try to raise added capital early. Also, markets have known about the tests for well over a year. We’ve known nearly as long when the results would hit. Banks have had all that time and more to prepare, considering all the rumors flying around before these tests were official, and they’ve shed a ton of assets. We aren’t saying they’ll all pass, but the likelihood this turns into a Lehman moment is slim to none.
|By Sarah N. Lynch, Reuters, 10/10/2014|
MarketMinder's View: At issue here is the definition of “accredited investor,” which is the qualification necessary for being able to buy hedge funds, private placements and participate in other tricky, complex deals. The current definition is sort of weird—it wraps in anyone with a certain level of income or net worth. Thing is, lots of folks earn high incomes and accumulate wealth through avenues that have nothing to do with investing, like being great at their jobs. Lots of folks with investing savvy don’t meet the income/net worth criteria. It is quite arbitrary, and we agree it seems ripe for a rethink. (We also give two enthusiastic thumbs up to the take here, which you can find about two-thirds of the way down the page.)
|By Matt Levine, Bloomberg, 10/10/2014|
MarketMinder's View: So the head of a firm that is a dressed up version of his former firm, which was busted for insider trading, is giving his employees financial incentives to be extra compliant. That seems weird, considering the law itself should theoretically be an incentive, but to each their own. What really caught our eye here was the parallel drawn with Europe’s belief banker bonuses incentivized risky behavior that caused the financial crisis (their words, paraphrased, not ours). They tried to fix this by capping bonuses at 100% of annual salary. Here is why this is a solution in search of a problem: “People in finance who make a lot of money for their employers get paid a lot of money, and it turns out that a lot of ways to make money for your employer are risky or illegal or ethically challenged. That's not a fact about bonuses or schemes or structures. That's a fact about markets, and about the sorts of people who work in an industry whose subject matter is, after all, money. You could mandate that everyone be paid a fixed annual salary, and then the people who made a lot of money for their employers one year would get big raises the next year, and the monetary incentives to make money would remain. There are margins at which structures can align incentives or reduce the rewards to risk, but the incentives will always be skewed: Your employer can always reward you more for making money than it can punish you for losing it.” In other words: This new compensation scheme will not de-risk the financial system forever and ever, amen.
|By William D. Cohan, The New York Times, 10/10/2014|
MarketMinder's View: Quick question: Were there any bear markets/financial panics before all these brokerage houses went public, beginning in 1970? Why yes! Yes there were! So what does that say of the theory investment bankers are now more greedy than they were before? Greedy bankers make for a great scapegoat, and we have no doubt there were some excesses, but the crisis wasn’t caused by the green-eyed monster rearing its head in a few Wall Street types. It was, as several have been, caused by the unintended consequences of regulation, compounded by the Fed and Treasury’s schizophrenic behavior.
|By Mohamed El-Erian, Bloomberg, 10/10/2014|
MarketMinder's View: Does it really matter? Guessing at the reasoning behind Fed rumblings is a fruitless endeavor. Investors don’t gain anything from trying to read into the latest Fed minutes, and they can’t help you predict Fed decisions. Those are unpredictable by definition, since they are a product of human thinking, bias and feeling. As for the Fed working with other nations to “achieve a better collective outcome,” we don’t really know what that means. Better than what? Is the status quo of a growing global economy where policymakers try to address local issues really so terrible? Seems to us more action would introduce more variables and therefore more risk of things going wrong. We have a hunch the world will be best off if they all just whisper words of wisdom and let it be.
|By John Ficenec, Denise Roland and James Titcomb, The Telegraph, 10/10/2014|
MarketMinder's View: So perhaps this is semantic nitpicking, but we feel compelled to point out that the FTSE 100, according to this article, is 7.81% below its most recent high, which is not yet a correction—defined as a short drop of 10% or more. Beyond that, none of the six charts here are evidence this volatility—which is a global thing—is the start of a bear market. Gold prices, the VIX and oil prices don’t predict stocks. Downturns in the Dow, German stocks and British stocks are not self-fulfilling prophesies or leading indicators for stocks globally. Bull markets usually end one of two ways: Euphoric sentiment gets way out of whack with sinking reality, or some big, bad, unseen thing knocks the world off course. Sentiment today doesn’t see just how bright reality is—a good disconnect, not a bad one. And none of today’s risks meet the big, bad, unseen criteria—they’re all the same widely discussed nonstarters markets have dealt with for this entire bull market.
|By Laura Saunders, The Wall Street Journal, 10/10/2014|
MarketMinder's View: First, news you can use! From this year on, your brokerage firm will send a marked-to-market accounting of all your IRA holdings to Uncle Sam. Second, let’s all take a deep breath, because there are a lot of weird proposals here, but there is also not much chance any of them pass. Gridlock, yay. For instance, proposals to cap IRA contributions once an account hits $3 million will probably go nowhere. Proposals to limit high earners’ contributions probably don’t have a future either. Beyond that, though, this whole endeavor seems myopic and unnecessary. For one, the GAO seems to be ignoring the elephant in the room: 401(k)s have much higher contribution limits, and many folks roll their 401(k) plans into IRAs after they retire or leave their job. That “you need an 18% return to get $5 million in an IRA and that’s like impossible so people much be doing shady things” thesis is flat wrong. Plus, there is no evidence high retirement savings are an economic problem. They’re good for retirees! We want folks to be secure in retirement! And considering tax revenues are already at all-time highs and rising and the deficit is falling, it’s not like there is some ginormous budget gap to fill.
|By Jack Ewing and Alison Smale, The New York Times, 10/10/2014|
MarketMinder's View: On the one hand—and counter to the thesis here—the world doesn’t rely on eurozone demand to fuel growth or “price inflation.” Inflation isn’t a necessity for a growing economy—it is a side effect of a growing money supply. Germany spending a few billion euro on roads doesn’t really impact the supply of dollars. And the world grew fine during six quarters of shrinking eurozone GDP. But on the other hand, an increasingly pro-growth (and pro-market!) shift in European policy isn’t a bad thing. More investment is more investment, ya know?
|By Jason Zweig, The Wall Street Journal, 10/10/2014|
MarketMinder's View: This article is jam-packed with nonsensical analysis hinging on mean reversion and skewed statistical analysis. For the uninitiated, mean reversion is the assumption averages predict future action. But averages result from the components, they do not predict them. So, here are a few examples from this article. If a bull market is longer than average, it must be near its end. If there has been no correction in a couple years, one is “overdue.” If the VIX averages 20, you can expect it to perk up from 19 soon. There are more here. But none of these are so predictive when you look at the underlying components. The last bull had no corrections from 2003 – 2006; the 1990s bull had zero corrections between 1992 and 1998. There weren’t any in the three year bull between 1987 and 1990. The VIX doesn’t predict directionality, and it really isn’t predictive of its own jiggles or stock movements. Finally, one quibble we have with this analysis: “A ride as smooth as 2014’s is profoundly abnormal. As of last night, the S&P 500 had fallen 4.13% from its all-time high closing price of 2011.36 on Sept. 18, 2014. Since 1927 there have been 425 drops of 4% or greater, or one every 75 days, says analyst Jeffrey Yale Rubin of Birinyi Associates, a research firm in Westport, Conn. The average loss in those declines has been 8.9%, and they have lasted an average of 27 days. In the current bull market, which began in March 2009, the average decline has been only 6.8% and has lasted just 19 days.” Yah, but the figures the analyst cites regarding market history include bulls and bears. What if you exclude the bears, when so much of the big negativity takes place?
|By Staff, Jiji Press, 10/10/2014|
MarketMinder's View: Well lookie loo, Shinzo Abe completed an economic reform! But before you hail the Japanese Prime Minister’s progress on the “third arrow” of his Abenomics economic agenda, here is a reality check. What would benefit Japan most is less uncertainty, less government picking winners and losers, freer markets and freer competition. Awarding subsidies and government contracts to firms that promote women does not tick all four of those boxes. Yes, we realize Japan would benefit from bringing more women into the labor force, and incentives do matter! But the methods here don’t do much to improve Japan’s structural backdrop. They simply reinforce the clunky status quo of state-heavy capitalism.
|By Mitch Tuchman, MarketWatch, 10/09/2014|
MarketMinder's View: Listen, fees are worth weighing in investing—there we agree. But we aren’t sure how you come to the blanket conclusion passive is categorically better than active based exclusively on this data. Consider: Most investors will still face these challenges:
Selecting an appropriate asset allocation.
Choosing which category of fund to buy (foreign/domestic/one/many).
Most passive fund companies offer groupthink strategies for the first one, which are often questionable at best. Failure at any one of those three points is likely to carry a price tag orders of magnitude higher than a slightly higher management fee. Finally, the mathematics at the end of this about charging exclusively for gains are skewed and wrong. Passive funds do the same thing, friend. And there is a reason: You aren’t just managing the gains, they are the result of a manager’s work. And a question: If the broad market falls 25% in a given year and you fall 5%, should the manager earn nothing? All this basically presumes investors in funds are more irrational than other consumers and buy despite a lack of value. Capitalism argues otherwise. For more on this topic, see Elisabeth Dellinger’s 02/18/2014 column, “You Get What You Pay For.”
|By Mike Dorning, Bloomberg, 10/09/2014|
MarketMinder's View: So how is it “official?” Simple! The Philly Fed created an index that basically scrapes a few major, long-lasting newspapers for headlines involving contentious political debate, on the assumption this is Very Bad for the economy and stocks. But those data points would never tell you how much rancor there is. They tell you only what the media chose to report on most frequently. Now, we aren’t journalists, but we are betting that few thought eyeballs would be grabbed by headlines proclaiming that Republicans and Democrats sat around a campfire and sang Kumbaya yesterday. The degree of rancor is always and everywhere subject to interpretation and not quantifiable. For example, the claim that one party’s policies crucify the American middle class on a “cross of gold” seems harsh to us. That happened during the rancorous gold and silver standard debate and was the statement of legendary politician W.J. Bryan. Look, we could do without the rancor, too—but the gridlock that probably has something to do with it is actually great for stocks and the economy. After all, we’ve had growth and a strong bull market while politicians have fought since 2010’s midterms. For more, consider our own Amanda Williams’ commentary from 10/11/2011, “It’s (Not Really Much) Different This Time.”
|By Joe Deaux and Laura Clarke, Bloomberg, 10/09/2014|
MarketMinder's View: It is perplexing people are making such a big deal over a four-day gold rally—especially considering just last week gold’s price came within a couple bucks of its current golden bear market low. Seems to us this wee bit of a bounce is less significant than the three-plus year and over 35% bear market (it dates to 9/06/2011) immediately preceding it, which the tail end of the article incorrectly dates and pays short shrift to. By the way, that three-year period began when virtually no one was discussing a short-term rate hike by the Fed, and was in fact during the time Operation Twist, QE3 and QE-infinity were launched. So maybe some skepticism is warranted about the thesis this pop is driven by the Fed holding off on hiking rates.
|By Greg Robb, MarketWatch, 10/09/2014|
MarketMinder's View: In the minutes from its September meeting, the Fed noted a handful of concerns, but the media seems to be latching onto one: the strong dollar hurting exports. Yes, a strong dollar makes exports marginally expensive—and some believe that can take a toll on globalized firms’ overseas business or profits. But it also means cheaper imports, and in the globalized economy, few companies produce goods from start to finish with domestic-only inputs. But bigger picture, and as we show here, there isn’t a clear relationship between dollar strength and trade. There is a much more clear relationship between global economic growth and trade, and the global and US economies will be fine, strong dollar or no. As for all the Fed forward guidance chatter surrounding rate hike timing—we’d suggest not reading too much into that. It’s all just words, words, words—actions speak much louder.
|By Staff, Associated Press, 10/09/2014|
MarketMinder's View: More evidence suggesting Ireland’s recovery continues—it plans to repay its bailout loans ahead of schedule. Why, you ask? Well, because the IMF charges 4.99% on the bailout money, a rate that looks like usury compared the 1.63% Ireland just sold 10-year debt for on the market. Back in 2011, when the acute fear of a chain of national defaults leading to a sudden splintering of the euro was widespread, Ireland paid sky-high rates (around 15%). The change here is impressive.
|By Eleanor Warnock, The Wall Street Journal, 10/09/2014|
MarketMinder's View: Maybe. But rather than a dour piece, this illustrates how sentiment is actually still rather lofty in Japan: A majority of forecasters who do see recession believe it’ll just be a blip—and in no time Japan’s economy will pick back up. But the Conference Board’s Leading Economic Index for Japan has been falling for some time and structural reforms don’t appear to be progressing. And a big factor is another sales tax hike is scheduled for 2015, but Abe is waffling on whether to implement it. From an investor’s perspective, you’d rather have clarity than indecision, even if the clarity is to implement the hike. For more on this topic, see our 08/14/2014 commentary, “Into the Abenomics Abyss?”
|By David Lawder, Reuters, 10/09/2014|
MarketMinder's View: So two points to consider here. One: The official budget report comes out tomorrow, and the CBO is projecting the deficit continued to fall in 2014. Spending ticked up a little, but rising tax revenues account for the drop. The second point is this: One month ago, the CBO projected a $506 billion deficit this year. So in a two-month forecast, they were 4% off. Extrapolate that degree of error out over the CBO’s longer forecasts and you probably see they don’t have the best track record in the forecasting department. For more on this topic, see our 09/12/2014 commentary, “A Surplus of Fun Factoids About the Federal Deficit!”
|By Brian Blackstone, The Wall Street Journal, 10/09/2014|
MarketMinder's View: So it seems the ECB is determined. But ramping up a quantitative easing(ish) program probably won’t do the trick. There is no actual evidence quantitative easing (QE) is actually inflationary. Instead, it seems QE reduces loan growth, in turn, dampening inflation. QE weighs on long-term interest rates, which likely reduce banks’ incentive to lend because they profit off the spread between short- and long-term rates. This ultimately constricts money supply growth. The US and UK experienced this. Plus, Japan’s 2001-2006 round of QE also didn’t materially increase inflation.
|By Mohamed A. El-Erian, Bloomberg, 10/08/2014|
MarketMinder's View: This gives the global economic “policy elite” far too much credit. Only in a command economy, like China’s used to be, would this be the case. And even if it were the case, the likelihood a supranational organization would help is close to zero. There is no evidence the IMF has done much of anything to spur economic growth, ever. But even if you disagree and presume the IMF can help, let us translate the recommendations here from jargon to English for you. According to this, the IMF should:
1) Argue for stimulus and debt writeoffs because having bond holders take losses (like Greece in 2012) and doing more of the same thing that happened in 2009 is clearly right.
2) Stimulus! Build roads!
3) This doesn’t mean anything. Firms aren’t web-savvy enough? Selfies threaten the global economy? We disagree.
4) Adding more Emerging Markets to the World Bank and IMF is fine, but ineffectual.
5) Boosting awareness of slow growth. We’d argue people are overly aware of it. They don’t even realize the IMF is forecasting accelerating growth and that the US grew at an above-average clip in three of the last four quarters.
So no, neither the IMF nor the ideas shared here can save the global economy. And that’s ok! Because the economy doesn’t need saving. It’s growing.
|By Oliver Renick, Bloomberg, 10/08/2014|
MarketMinder's View: We would usually not provide you such a myopic article, but there is an occasion for everything, we guess. The "lowest since August" is a 3.8% decline from a record high. For the record, there have been 63 days in bull markets with a single-day drop exceeding that. Moreover, tying it to widely known, rehashed bunk like the IMF's assertion low interest rates raise the risk of bubbles misperceives how markets work. And eurozone fears? Really? That's so 2011. Also, and here is why we are providing you with this, really: "It really was a risk-off day...." What a bunch of meaningless industry jargon. Shouldn't it, if we're being totally literal, have been a volatility “risk-on” day?
|By Larry Zimpleman, The Wall Street Journal, 10/08/2014|
MarketMinder's View: Yes, but most folks have been arguing this very position since 2009—“The New Normal,” for example. Yet stocks have annualized 21% in this bull market, matching bull markets’ historical average. This is not to say returns will be in line with the average over the next 20-30 years. That is unknowable. It is to say that if you can afford to save more early, you should regardless of your return expectation. It is better to over-save than under. Also, as an aside, “Save More!” is a big, fat wealth manager cliché. We’d argue there is a second step: Identify where you have flexibility in your expenses in detail. If returns turn out weak, cut discretionary expenditures. But of course, before you do that, Save More!
|By Clifford Krauss, The New York Times, 10/08/2014|
MarketMinder's View: Well, this goes a bit too far in suggesting the loading of the first tanker to ship US oil produced in the lower 48 is a gamechanger. It is a step in the right direction—permitting exports of US crude—but only a step. However, the article is also a very interesting update on the issues involved with permitting oil shipments. For our take on this, see our 06/27/2014 commentary, “A Slightly Refined, But Still Crude Export Ban.”
|By Simon Kennedy, Bloomberg, 10/08/2014|
MarketMinder's View: This is another one of those articles that credits the Fed for stock returns, in this case going back to the notion that bad news was at one time good news because, yippeee!, we'd get more monetary "stimulus." But now, with US quantitative easing winding down, the theory is bad news is back to being bad news. However, it is more realistic to note that not all news over the past five years was bad. Maybe, just maybe, it was the positive news on the corporate profits, revenues, economic growth and more that drove it? Maybe, just maybe, stocks saw through things like the three-month slowdown in hiring referenced here—realized it is all backward-looking, late-lagging and still reflected growth—yawned, and moved on?
|By Aaron M. Kessler, The New York Times, 10/08/2014|
MarketMinder's View: This is an excellent read on the trial itself and one offering some insight into the issues with the government’s haphazard, unpredictable response to 2008’s financial crisis. They eschewed practices that have historically worked to head off crises, instead, as former NY Fed head and Treasury Secretary Tim Geithner put it, “We were operating outside of the boundaries of established precedent.”
|By Szu Ping Chan, The Telegraph, 10/08/2014|
MarketMinder's View: Let’s cut right to the chase: The IMF here is warning that tighter monetary policy—a one percentage point rise in rates—would drive $3.8 trillion in unrealized losses on debt held by shadow banks, and that this could create a crisis. But the issues with this analysis are two-fold: 1) If the shadow banks don’t blow out of the positions, they may not take any losses. And 2) Interest rates rose by more than one percentage point last year. Was there a crisis? If so, we didn’t notice it amid the world economy growing and world stocks rising 27%.
|By William Horobin, MarketWatch, 10/08/2014|
MarketMinder's View: Hey, look, annualized growth of 0.8% isn’t exactly grand, but it also isn’t the nearly as gloomy as the common sentiment toward the eurozone.
|By Lu Wang, Bloomberg, 10/08/2014|
MarketMinder's View: Quick question: When have either the Fed or the IMF spotted a bubble before it burst? The answer to this question—"Why, never!"—is why we share the skepticism of the financial pros interviewed in this piece.
|By Liyan Qi, MarketWatch, 10/08/2014|
MarketMinder's View: Yes, it did edge lower. But to 53.5, which is still indicative of growth in China’s largest economic segment. Still no hard landing in these data, despite the gloomy interpretation of some.
|By Matthew J. Belvedere, CNBC, 10/08/2014|
MarketMinder's View: The idea of a bear market “checklist” is ridiculous. All of these are open to interpretation, all are shades of gray—not black and white. But we also watched the video and it gets even worse! A correction checklist! Which is: China hard landing fears; geopolitics; Europe; corporate profits (we guess weakening, though the pundit didn’t say); average hourly earnings (We guess stay flattish? Pundit didn’t say); Venezuela (!?!?!) and Puerto Rico; and … wait for it … Ebola. This tick-box approach to money management won’t work, not in forecasting bears and certainly not in forecasting corrections (which is impossible).
|By Sarah Halzack, The Washington Post, 10/07/2014|
MarketMinder's View: Maybe! But if so, it won’t be because of low gas prices and a so-called wealth effect from rising stocks. The wealth effect is a myth, and gas prices just aren’t a significant driver of much of anything. Not that we’re all Debbie Downer on the US or anything—we’re bullish!—but this argument is sunny for the wrong reasons, in our view.
|By Jon Sindreu and Jason Douglas, The Wall Street Journal, 10/07/2014|
MarketMinder's View: UK factory output slowed to +0.1% m/m, tied largely to a drop in auto production as export orders fell and plants stayed closed longer than usual for maintenance—a combination of normal data variability and seasonality. This isn’t evidence the UK is “overly dependent on domestic” demand or super vulnerable to Russian sanctions and slow eurozone growth. Though the second half of this article does highlight many of the UK’s bright spots.
|By Jeremy Warner, The Telegraph, 10/07/2014|
MarketMinder's View: And they are (according to the IMF): 1) Regional conflicts and protests 2) Conflict in Ukraine or Iraq hurting oil production and sensing prices spiraling 3) A Chinese hard landing, like really this time 4) Rate hikes and the potential for a “disorderly unwind” of quantitative easing (QE) 5) A eurozone deflation/doom spiral, or lost decade 6) Permadecline in technological advancement 7) High public and private debt 8) Markets are ignoring risk 9) Housing bubbles 10) Aging populations. To those, we say: 1) History. 2) Even if oil production in Iraq or wherever (um, Ukraine? No.) falls, the US and Saudis are pumping like crazy. 3) China has its fair share of imbalances, but they’ve been slowly tackling them for four years now. 4) History shows rate hikes aren’t bearish, and neither the Fed nor BoE has plans to unwind their balance sheets tomorrow. 5) Deflation is a) not happening in the eurozone and b) not a self-fulfilling prophesy. 6) Please see the shale boom, advances in robotics and continued progress in microprocessing to see why this is a false fear. 7) Debt doesn’t deter growth. Consumers and businesses get a pretty good return on debt, actually. 8) Maybe stocks are up because earnings and economic reality are up? 9) Even if there are housing bubbles in a couple Emerging Markets economies, can this really whack a few trillion off global growth? 10) Demographic trends are not cyclical economic or market drivers.
|By Andrew Mayeda, Bloomberg, 10/07/2014|
MarketMinder's View: Did anyone else notice that everyone is fussing over what amounts to a forecast for faster global growth? Sure, it’s slower than the initial projection, but when has the IMF not revised down its forecasts? And when has any of that mattered for stocks, which look to much more useful factors than the forecasts of one bureaucratic think tank?
|By Mohamed A. El-Erian, Bloomberg, 10/07/2014|
MarketMinder's View: So there are some good points here, like the fact Emerging Markets aren’t nearly as bad off as mass sentiment suggests. And they indeed aren’t “regressing to the old crisis-prone world of old.” And yes, all India, Brazil, China and Russia have all taken steps back policywise or only slowly inched toward reform—and for China, at least, future reality appears quite likely to exceed expectations. We can’t quite say the same for India, where expectations for the new government are sky-high. Brazil, maybe, but let’s talk after the election. More broadly though, we’d just like to add a public service announcement: There are 19 other official Emerging Markets, each with their own opportunities (or risks)—investors shouldn’t categorically embrace or shun EM as a bloc (or assume they’re all Fed-dependent, a topic for another day). It isn’t that simple. For more, see our 10/06/2014 commentary, “Taiwan Is Not Greece, and Other Reasons to View Emerging Markets Individually.”
|By Jonathan Clements, The Wall Street Journal, 10/06/2014|
MarketMinder's View: Well it depends on what you mean by “stock selloff.” If you see rampant euphoria amid deteriorating fundamentals or a big bad nobody else sees—harbingers of a bear market—then yes, it makes sense to prepare mentally and tactically to adjust your portfolio. In our view, those conditions don’t currently exist. However, if you’re planning for a sharp, sentiment-driven 10-20% decline in the market—a correction—it makes little sense to try and sidestep it, since corrections can end about as soon as they begin and can’t be timed with any reliability. Other than bear markets, we suggest your personal goals and objectives drive your portfolio allocation—planning for pullbacks can mean missing the powerful upside of bull markets and reducing compound growth. That, after all, is why you invest. Not missing downside. Here is one more thing. The article states, “But if you fear you’ll panic and sell, it’s much better to panic and sell today, while the S&P 500 remains only modestly below its all-time high.” Why on earth are you letting panic, fear or any other emotion govern your investments? That, friends, is a recipe for financial disaster. If this is you, please take the following actions:
Log off your brokerage account.
Turn off the financial media (online, TV or other).
Consider getting professional help.
|By Chana R. Schoenberger, The Wall Street Journal, 10/06/2014|
MarketMinder's View: Not at all. As this piece highlights, a couple of really bad years (e.g. 1929—it says 1927 in the article, but there was no crash of ’27, that crash was in ’29—1987 and 2008) have given October a scary reputation, but the average return since 1928 is positive and stocks have risen in nearly 60% of Octobers. That’s not to say October is bullish—it’s just a thing. The calendar isn’t a market input. Making investment decisions based on seasonal adages—from “Sell in May” to “financial hurricane season”—can lead to expensive opportunity costs for long-term investors. However, one quibble: This piece neglects to apply the “past performance” axiom for its point about the VIX, the so-called “volatility index.” October’s historically high VIX readings don’t mean anything for markets looking ahead either, especially given the VIX’s poor forecasting record.
|By Lu Wang and Callie Bost, Bloomberg, 10/06/2014|
MarketMinder's View: While it’s true that buybacks have been high and rising, this isn’t correct math. Most buybacks are debt-funded, as firms play the spread between their earnings yield and low interest costs. Also, supply and demand for stocks are the ultimate drivers of prices. Buybacks reduce share supply on the market, meaning less demand for stocks is needed to make prices rise. They also increase shareowners’ stake in future earnings, the principal attraction of an equity in the first place. Finally, business investment is at a record-high, so companies are investing in growth and expansion. This bull market, contrary to the theme in this piece, is driven by underappreciated economic growth, gridlocked governments and increasingly optimistic investor sentiment, to name a few. For more, see our 09/17/2014 commentary, “A Buyback Boost?”
|By Matt Egan, CNN Money, 10/06/2014|
MarketMinder's View: This is just packed with fallacies. First, it presumes quantitative easing (QE) charged up the bull, making investors euphorically drunk and blind to risks. But for one, there are few signs of euphoria anywhere. Valuations—other than the heavily flawed CAPE—are middling. People aren’t ignoring risks or volatility. Like this article does, they are trumping up historically normal or small swings and looking for causes. Also, it is not as though investors aren’t aware QE is ending. It has been on this course for the better part of a year and talked up since May 2013. It isn’t as though stocks are likely waking up, shocked to find out October follows September, and shocked even more to see that the Fed has publicly announced $10 billion less in additional bond buying in all seven meetings since last December. Stocks move before expected events, not after. And as we’ve highlighted before, QE hasn’t been a big boost to stocks or the economy. By flattening the yield curve, QE disincentivized banks from lending—an economic sedative, not a stimulant. Ever since the taper was officially announced last December, loan growth has been improving—more fuel to the US’ economic expansion.
|By Staff, Reuters, 10/06/2014|
MarketMinder's View: Here is more evidence for why the Fed should not consult any administrative branch of the government—decisions get politicized. Former Treasury Secretary Henry Paulson stated that the government wanted to avoid creating moral hazard and that the terms of AIG’s bailout were meant to be harsh, since AIG was a “symbol for all that is bad on Wall Street.” And the people were really mad with Wall Street during the crash! So he hit them hard. When it came to Citigroup? Then Paulson wanted to punch short sellers, not deal harshly with another symbol. However well intended, this isn’t a basis for good policy. The government shouldn’t act arbitrarily for a few poll points, but hey, they’re politicians and they live for the now. This mentality is what added to the confusion and uncertainty, worsening the 2008 Financial Crisis. For more, see our 10/01/2014 commentary, “Independent for a Reason.”
|By Staff, The Economist, 10/06/2014|
MarketMinder's View: Brazil held the first round of its presidential election this past Sunday, with incumbent Dilma Rousseff’s taking first place as expected. However, Party of Brazilian Social Democracy (PSDB) candidate Aécio Neves surprisingly beat Socialist candidate Marina Silva for second by a wide margin—a big surprise, considering Silva was projected to beat Rousseff in a run-off election as recently as a month ago. Brazilian markets have been tracking the race closely, and even though Rousseff remains favored to beat Neves in the run-off set for October 26, we bet that continues.
|By Alessandro Speciale, Bloomberg, 10/06/2014|
MarketMinder's View: Germany’s August factory orders fell -5.7% m/m (-1.3% y/y)—off analysts’ expectations of -2.5% m/m, 2.6% y/y—prompting concerns of weakness in the eurozone’s largest economy. This isn’t a great report—the year-over-year trend is now negative—but the number shouldn’t be cause for alarm either. Core orders were down a more mild -2.5% m/m and July’s reading was one of the largest month-over-month gains since 2009. In fact, if you combine them, two-month rolling order growth is still positive, albeit not robustly so. Given investors’ increasingly dour views towards the eurozone, meh-ish economic growth likely exceeds most expectations.
|By Ylan Q. Mui, The Washington Post, 10/03/2014|
MarketMinder's View: Here is everything you wanted to know about September’s jobs report: numbers, analysts’ interpretations, interest rate guessing, political implications and all the rest, in 928 words and one chart. We’d suggest glossing over the analysts’ parsing and speculating and instead gleaning four simple takeaways. 1) This is nice confirmation of the economy’s recent strength. 2) Because it’s just confirmation of past growth, improving unemployment doesn’t predict stocks. 3) Unemployment doesn’t drive inflation. 4) Nothing in todays’ report tells you when the Fed will hike rates.
|By Allister Heath, The Telegraph, 10/03/2014|
MarketMinder's View: Ladies and gentlemen, your supposed reasons: Slow eurozone growth, rate hike jitters, China slowdown, EU parliamentary infighting over the new European Commission nominees, the West’s airstrikes on ISIS, Ebola and signs of slowing UK growth. Not to be dismissive or anything, but this really looks a lot like all the same widely discussed negatives that have persisted throughout this bull market. Save for the rate hike thingy, but you can swap in end of quantitative easing fears from 2011, 2012 and 2013, because Fed tightening fears are Fed tightening fears. And you can swap Ebola for swine flu in 2009. And ISIS for the Arab Spring, Libya, Egypt, Syria and Ukraine/Russia at various points during the bull. Now, it is entirely possible any or all of these could be impacting sentiment right now, and that can impact stocks. It is also entirely possible this is just normal causeless volatility. Either way, none of these issues—as a single thing or all together—is big enough or surprising enough to end the bull market. Little negatives can chip and growth and sentiment, but it takes a few trillion worth of surprising negatives to knock a bull market off course, and these do not fit the bill.
|By Elizabeth Campbell and Lorraine Woellert, Bloomberg, 10/03/2014|
MarketMinder's View: Or maybe the banks are getting him back for shrinking their net interest margins—profits—with quantitative easing! Ha! Err…kidding. Actually, what’s perplexing here is our former Fed head’s quickness to blame this very anecdotal evidence of tight credit on banks’ response to regulations. Like it’s their fault the feds smacked them with tighter rules, higher capital requirements and arbitrary stress tests. And he entirely ignores the impact of the yield curve—the spread between long and short-term interest rates—which directly impacts banks’ loan profits. If the cost and risk of refinancing a loan to Gentle Ben isn’t worth the revenue over time, banks won’t do it. His theory here is actually quite a microcosm of the problem with his actions while at the helm of the Fed.
|By Benoît Faucon and Summer Said, The Wall Street Journal, 10/03/2014|
MarketMinder's View: There are a few ways investors can look at this fascinating read about oil’s recent slip and some fracturing within OPEC. There is the obvious, which is that OPEC’s ability to manipulate prices is not what it was in the 1970s, whether that’s due to discord or the shale boom. There is also the less obvious: Folks always fret Middle Eastern conflict and strife as a huge potential negative on oil production and supply—and a trigger for a price shock. The ISIS situation, for example, was supposed to send prices skyrocketing, according to headlines over the summer. Yet as this shows, oil production happens all over the world, and prices are determined globally. And unilateral decisions by one nation—in this case Saudi Arabia—to keep output high and break with price manipulation can more than offset risks in other localized areas.
|By Neil Irwin, The New York Times, 10/03/2014|
MarketMinder's View: Setting aside our differences with some of the qualitative statements about the economy, this is one of the most informative, concise post-mortems on September 2008 that we’ve seen in a while. Sure, it excludes key historical evidence like the Fed transcripts from the day after Lehman’s bailout, which pretty much confirm their decision to deny funding was deliberate, unnecessary and arbitrary, but other than that! This shows just how inconsistent the Treasury and Fed’s bail-them-out-but-let-those-cats-fail-and-oh-hey-we-should-nationalize-that-one decisions were. And it sums up the impact: “… policy makers were reluctant to lay out in advance some framework of what institutions would be rescued and which weren’t, viewing strategic ambiguity as their friend. They didn’t want to pre-commit. That added to the uncertainty of a difficult time, and with hindsight some clearer sense of the rules of the game when the financial system is under stress might make the consequences less severe.” (Though, we think they can probably unhedge that last sentence.)
|By Staff, Associated Press, 10/03/2014|
MarketMinder's View: As usual, we suggest you skip past the trade deficit, which does not, in fact, “[subtract] from economic growth because it usually means that foreign companies sell more in this country while US producers see fewer sales in overseas markets.” Look instead to total trade—exports plus imports—since imports are a gauge of demand. And you will find exports rose to an all-time high, and imports rose too, all of which is dandy (though backward-looking). Also fun, you can see the shale boom’s continued, um, boom! in gangbusters petroleum exports and dwindling imports (a simple function of rising domestic production). And more fun: That all-time high in exports happened even though exports to Russia fell another -10.4% m/m (-20.1% y/y) as sanctions bit harder. Put that in your pipe and smoke it, Mr. Putin!
|By Scott Hamilton, Bloomberg , 10/03/2014|
MarketMinder's View: Well, before you buy this whole "recovery isn't assured," "losing momentum" theme, consider: A PMI reading of 58.7 is still strong. And new orders rose, which is the closest thing to a forward-looking indicator under the headline PMI level.
|By Ambrose Evans-Pritchard, The Telegraph, 10/03/2014|
MarketMinder's View: There really aren’t any investor takeaways here, considering the likelihood Hong Kong’s pro-democracy protests significantly impact Chinese growth, economic policy or overall political stability is basically nil. But it is a ripping-good read, full of interesting political insight, and very well researched. If you’re curious about the political machinations at work right now, this is your source. Enjoy.
|By A. Gary Shilling, Bloomberg, 10/03/2014|
MarketMinder's View: Here are the remaining alleged five warning flags promised in part one of this two-part series yesterday, which you can scroll down to see our take on. As for these, shall we again go one-by-one? Alrighty then!
1) We’ve had four years of slowing Chinese growth and three years of broad Emerging Markets underperformance. We’ve been fine. We don’t see any reason it should be different today—not with the facts on the ground near-identical to 2010, 2011, 2012 and 2013.
2) Currency moves are largely zero sum for global investors and multinational corporations. Strengthening currency means imported components are cheaper and exports pricier. Weakening currency means exports are cheaper but costlier to produce if you’re importing parts. It all just offsets, and none of it has historically driven markets.
3) Calling high buybacks in 2007 a sign of the peak assumes that bull ended in a haze of euphoria and ignores how it was truncated by the destructive impact of FAS 157 on bank balance sheets. It also ignores buybacks’ impact on stock supply, which is a positive.
4) Dividends are not a market driver.
5) The success of a few IPOs here and there—particularly in companies as big and established as Alibaba—isn’t a sign of euphoria. The real sign would be if all the IPOs were low-quality and no one saw it—the sort of made-for-IPO-not-long-term-profits companies everyone jumped on irrationally in 2000. Most of today’s IPOs aren’t of that flavor.
|By Staff, Bloomberg News , 10/03/2014|
MarketMinder's View: This headline is sort of wrong in the sense that while the number fell, China’s services gauge showed slower growth, not an actual decline in output. Services are also growing faster than manufacturing, and they’re the largest segment of China’s economy, so overall this shows the world’s second-biggest economy is doing better than most of the crash-obsessed media commentary would imply.
|By Paul J. Davies, The Wall Street Journal, 10/03/2014|
MarketMinder's View: Our views here are pretty simple. More new banks means more competition, and competition is good. Don’t get yourself down by seeing it as a mortgage supply glut that starves businesses of credit. Because for all we know, challenger banks like these—along with a steeper yield curve—could free up the bigger banks to finally fill the void in business lending. You never know! But in short this is an overall positive development for the UK economy.
|By A. Gary Shilling, Bloomberg, 10/02/2014|
MarketMinder's View: Let’s lower the four flags raised here.
1) Price-to-earnings (P/Es) ratios give you a rough sketch of what sentiment is like—they have no predictive value of where stocks will go in the future. And that’s normal P/Es! The CAPE is worth even less, considering it averages earnings over a decade, which is very backward looking.
2) Stocks don’t need gangbusters economic growth to keep rising. They move the most on the gap between sentiment and reality, and with many folks still doubtful of the global economy’s strength (see headlines about the eurozone and China and this very “flag”), slow, uneven growth is likely better than many expect.
3) Cost cutting isn’t the reason businesses are profitable—both earnings and revenues have kept on growing, and given business investment recently hit a new high and balance sheets are flush with cash, companies look poised to keep growing in the near future. Besides, margins are near record-highs today. What’s to say they stocks can’t move higher with lower profit margins? Nothing! They’ve done it in every bull on record, because this is, you know, the highest they’ve been. (It is also weird to worry about highly profitable businesses if you are an investor.)
4) The Fed first alluded to tapering back in May 2013. It actually started tapering at the beginning of this year. Yet the bull has marched on. The end of quantitative easing isn’t a surprise to anyone—the market has long digested the news and looked ahead for a while now.
|By Jack Ewing, The New York Times, 10/02/2014|
MarketMinder's View: The ECB’s September announcement of a program to buy eurozone asset-backed securities (ABS) and covered bonds—which some have called quantitative easing—didn’t include two pretty significant details: the program’s size and duration. Now we know something about the duration: Draghi said the program will be launched in mid-October and run for two years. And in that period, it will aim to buy a still-unannounced amount of eurozone ABS and covered bonds (including some issued by Greek and Cypriot firms, as many had speculated). But a big mitigating factor here is these markets aren’t that big, which may mean the ECB buys a very small amount of this debt on a relatively long time-table, limiting any impact (positive or negative). In our view, though, disappointment over the announcement is largely misplaced. The issues weighing on eurozone lending and inflation are more tied to regulatory considerations like stress tests and efforts to increase capital. For more, see our 09/08/2014 commentary, “ECB’s Latest Move Spurs Currency War Chatter.”
|By Steven Russolillo, The Wall Street Journal, 10/02/2014|
MarketMinder's View: There is one sensible part of this: “The Russell 2000 (in this bull market) has been 4.5 times as volatile as the S&P 500 and 10% declines in small stocks do not necessarily lead to a corresponding decline in the S&P 500.” True. But the rest ignores a key fact: Small cap lagged on the way up in Q4 2013. And they’ve trailed in two of the three subsequent quarters. Leadership has been choppy, but this is what a rotation tends to look like. So, while we aren’t suggesting bad times are ahead for small caps, we are suggesting it’s entirely possible they trail bigger and mega caps. That is a phenomenon that has repeated itself in many historical cycles. Oooo! Here is one other, behavioral lesson about this: Lots of folks think they’ll wait for a correction to hit before they get in. Then the media tells them, “The worst likely isn’t over,” and they don’t do it. After all, it usually isn’t a correction investors fret, but that the correction (or other downdraft) is a bear. It is unlikely that fear evaporates at a correction’s deepest points.
|By Jonnelle Marte, The Washington Post, 10/02/2014|
MarketMinder's View: “Stocks ended the quarter pretty much right where they started. But it was a white-knuckled roller coaster ride getting there.” Buuuuuuuuuuuuuuuuuut. The volatility seen in Q3 was not high by historical standards, so is this the most boring roller coaster ever? Like a miniature coaster, with muted dips and dives? And peaks as high as the mountains in Florida? Experienced investors know volatility when they see it, and we bet many snorted at the opening of this piece. This mixed take puts a bit too much emphasis on making portfolio decisions based on volatility and widely known factors that haven’t much slowed the bull all year. Now, there is a time to get out of stocks. But in our view, it’s when you notice deteriorating economic fundamentals or some other big bad looming few others else see. Otherwise, portfolio decisions should be made based on your personal goals and objectives. Deciding to take some money out of the market because of geopolitics or the possibility the Fed hikes rates soon is akin to market timing—not a winning strategy for long-term investors.
|By Clive Crook, Bloomberg, 10/02/2014|
MarketMinder's View: So by “inflation panic,” this means the US and UK central banks could prematurely freak out over inflation—misinterpreting what we are told are is a disconnect between headline unemployment (which implies not much labor market slack) and other labor market indicators that look more slacky and are therefore apparently “right.” And their early freakout would mean an early rate hike and thus an early end to the expansion. A couple issues here. One, the wage/price spiral theory this all rests on was pretty widely debunked over 40 years ago. Two, even if the US and UK were to hike tomorrow, there is no reason this has to be negative. History shows the first rate hike in a tightening cycle isn’t inherently bad for economies and stocks.
|By Staff, CNBC, 10/01/2014|
MarketMinder's View: We are typing this at 10:29 AM Pacific Daylight Time on October 1, 2014. This article was posted 23 minutes earlier, according to CNBC. That means it hit the wires exactly 3 hours and 36 minutes into October’s trading. Could this be any more myopic? Yes, yes it could! But … why? Oh! And four of the five preceding first-day-of-October declines (assuming the close is, in fact, lower) were in 2005, 2006, 2009 and 2011. None of these preceded a bear. In fact, that 2011 point would’ve been at about the bottom of a correction! (The S&P 500 Price Index rose 10.8% that month.) Since 1928, the S&P has risen in 58% of Octobers. Seems to us most of its reputed negativity ties to 1929, 1932, 1987 and 2008, which were indeed terrible, but not caused by the calendar.
|By Jeffry Bartash, MarketWatch, 10/01/2014|
MarketMinder's View: “US manufacturing companies grew at slower but still rapid pace in September, a survey of executives found.”
|By Kenneth Corbin, Financial Planning, 10/01/2014|
MarketMinder's View: This is a very interesting and quite sensible piece discussing one factor at the heart of 2008’s financial crisis: How to prevent a run on a non-bank financial? Granting them access to the discount window could provide nonbanks liquidity to meet current obligations, and, as noted here, “Panics result from runs on short-term financial liabilities, and in our modern financial system runs no longer just occur on bank deposits.” The Fed was created to serve as lender of last resort to address runs on bank deposits, and it seems to us this time-tested tool could add value for more modern bank funding markets, too. On a semi-related note, here is Matt Klein discussing the difference between insolvency and illiquidity. What we take from this is that the proper strategy for heading off crises is to 1) eliminate procyclical regulation like FAS 157’s fair-value accounting and 2) broadly provide liquidity via the discount window to banks and nonbanks so the question of solvency vs. liquidity never arises, eliminating the risk political decisions are made.
|By Esteban Duarte, Bloomberg, 10/01/2014|
MarketMinder's View: This. Is. Noise. Consider: While he announced the cancellation of the region’s independence vote after Spain’s highest court shot it down as unconstitutional, Catalan Regional President Artur Mas claims he will do something. Something completely undefined even in the broadest brushstrokes. Which we can all claim, but we doubt it carries the force of the Spanish constitution. Just sayin', watch what they do, not what they say.
|By Joshua M. Brown, The Reformed Broker, 10/01/2014|
MarketMinder's View: So the candlestick charting and technical analysis in here regarding the Russell 2000 and S&P 400 Mid Cap Indexes breaking through their 200-day moving averages in a downward direction is really only a reflection of past performance—not predictive of a broader downturn approaching. It’s a nifty looking graph, we guess, but all it speaks to is the narrowing market breadth and the ongoing rotation from small to bigger in 2014, as we alluded to in our 09/25/2014 commentary, “Ken Fisher: ‘Nothing Is Better—Stocks Are Stocks.’ Even Small Caps.” While we aren’t suggesting small- and mid-cap stocks fall from here, it is worth noting there is a historical tendency for them to trail much bigger stocks later in bull markets, as new converts to optimism tend not to seek out micro-cap South Korean biotechnology firms. Rather than another shoe dropping, we’d suggest this is more likely another leg of the bull starting.
|By Simon Kennedy, Bloomberg, 10/01/2014|
MarketMinder's View: There is some sense here, mostly in that if the Fed stops talking down the economy, sentiment may improve. However, the whole article seems to be (another!) operating on the premise firms aren't investing in expansion, which disregards the recent growth pickup underpinned by rising (and record-high!) business investment. (Q1 2014's weather-driven dip notwithstanding.)
|By Michael S. Derby, The Wall Street Journal, 10/01/2014|
MarketMinder's View: The fed funds target rate is currently in a bandwidth of 0-0.25%, but effectively the Fed manages this through the use of its new reverse repo facility as the floor. But the floor seems to maybe have a trap door too, in the sense the Fed voluntarily capped daily reverse repos at $300 billion and if demand tops that it could drive rates below the floor (currently 0.05%). That is what happened here, but we don’t really think it’s that significant. For one, the $300 billion limit is totally arbitrary, something that Yellen and Co. basically pulled out of thin air a month or two ago. They could just pull a bigger number out of thin air, if needed.
|By Staff, NPR, 10/01/2014|
MarketMinder's View: Now, to be clear: This is not a statement about Sen. Elizabeth Warren, and always remember that we favor neither party, as both of them do wacky things from time to time. Our aim is solely to analyze proposed legislative or regulatory changes based on facts, not ideology, and assess potential market impact. And based on facts, with due respect, we believe this Senator’s portrayal of 2008 and her resulting recommendations are wide of the mark. We think the overwhelming weight of evidence shows the crisis was not caused by a lack of regulation or regulators not acting strictly enough. While some banks may have gone to excesses, the reality is actual loan losses are very small relative to the trillions FAS 157 (an accounting rule implemented in November 2007) required them to write down unnecessarily. Combine that with the folks over at the Treasury and the Fed getting creative in crisis management, and what you create is a panic based on unpredictable regulator moves. Arbitrary actions contributed to 2008’s panic. So the recommendation regulators act more strictly in a manner inconsistent with the basic framework of the law is a recipe for arbitrary judgments that are by definition extralegal. Governments acting in an arbitrary manner outside the law is not a recipe for a safer financial system and markets.
|By Ansuya Harjani, CNBC, 10/01/2014|
MarketMinder's View: SPOILER ALERT: The market in question is Japan’s stock market. COLD WATER ALERT: Not to rain on the parade, but the reasons cited herein are either wrongly perceived (weak yen, which is neither a plus nor a minus; Abenomics’* “slow progress”) or baked into existing expectations (pension reform, which so many Japanalysts talk up). In our view, this article basically illustrates the fact that investor sentiment regarding Japan—yes, among pros, too—remains too high. For Japan’s markets to outperform, we believe the Abe administration must make much more headway toward enacting structural reforms. That, and there is still uncertainty surrounding whether or not Abe will go forward with sales tax hike part deux.
*By Abenomics, we presume they mean The Third Arrow structural reforms we are referring to as well. The difference is that “slow progress” is actually more like “no meaningful progress” beyond a long-term, incremental corporate tax reduction and a couple of other window-dressing moves. Nothing on liberalizing trade. No progress on major labor market and agricultural subsidy reforms. Keiretsu reform is also lacking. They haven’t even passed legislation permitting casinos to boost tourism, one of Abe’s first Third Arrow proposals.
|By L.A. Little, MarketWatch, 09/30/2014|
MarketMinder's View: Well, maybe, because these things are only clear in hindsight. None of the technical analysis here can really tell you whether a correction is forming or not—corrections (quick, sharp drops of -10% to -20% over a few weeks or months) are driven by sentiment, not past performance. Plus, this analysis is overall very confused on whether it’s trying to predict a correction or a bear market—again relying on past performance rather than trying to identify a fundamental cause. We look at potential fundamental risks every day, and we can’t identify any with enough scope or surprise power to cause a bear market tomorrow. With the bull market extremely likely to continue over the foreseeable future, if folks get out of stocks on “the offhand chance [the approaching rainstorm] turns into a hailstorm,” but instead it “turns out yet to be another sprinkle,” missing “some opportunity at the cost of safety” is not a “small price to pay.” Opportunity cost is expensive. For more, see Todd Bliman’s 06/09/2014 column, “The Cost of Trying to Time Corrections.”
|By Szu Ping Chan, The Telegraph, 09/30/2014|
MarketMinder's View: With the third revision to UK Q2 GDP—bumped up to growth of +0.9% q/q, beating expectations—we finally have the expenditure breakdown. Business investment rose +3.3% q/q (+11% y/y), and real disposable household income jumped. We also got the results of the big recalculation, which adds R&D spending to business investment (and adds some colorful, illegal activities to GDP) all the way back to 1997, and it shows some interesting things. Like businesses invested a heck of a lot more throughout this recovery than statisticians first thought. And the world’s oldest and second-oldest professions are pretty big moneymakers. All interesting. Backward-looking, but interesting. We guess, if nothing else, the UK is on even firmer footing than everyone thought?
|By Staff, EUbusiness, 09/30/2014|
MarketMinder's View: Eurozone inflation fears continue as inflation dropped to +0.3% y/y in September (a flash estimate). However, much of the weakness continues to come from falling energy prices—not a mark of actual deflation. Core inflation, excluding energy and food prices, is at +0.8% y/y. As for the ECB angle, we’ll see whether ECB President Mario Draghi gives more details on his upcoming quantitative easing (QE) program on Thursday, but we still believe this is a solution in search of a problem. As we wrote here, QE is deflationary and contractionary.
|By Staff, Xinhua, 09/30/2014|
MarketMinder's View: Good news: “China will allow direct trading between the yuan and the euro.” That the government is making currency trading cheaper and more accessible (no need for parties to use the US dollar as an intermediary) will likely make the yuan more attractive globally and strengthen investing relations between China and the EU. A win-win!
|By Timothy B. Lee, Vox, 09/30/2014|
MarketMinder's View: “Burn rates” (the amount of cash a company burns through in a given period) are important, and high burn rates were one sign dot-coms were hugely overvalued at the Tech Bubble’s heights. But those were publicly traded companies. As far as we can tell from the reporting here and the study it cites, the analysis includes only pre-IPO firms. High burn rates among firms reliant on venture capital funding aren’t signs of euphoria—this is just sort of how it goes for fledgling firms taking big risks. What would be a sign of euphoria is if all these firms went public tomorrow at huge premiums.
|By Staff, Bloomberg News, 09/30/2014|
MarketMinder's View: China spent most of the past four years curbing second and third home purchases in order to contain rapidly rising prices. Meanwhile, cities continued investing in massive home construction projects to boost growth. The result? A supply glut and artificially pinched demand—and weaker prices. So now China is removing those curbs to boost demand. Theoretically, this should support prices and help combat that supply glut, but it isn’t a panacea for China’s property market.
|By Anna Prior, The Wall Street Journal, 09/29/2014|
MarketMinder's View: If this bull market is indeed “overdue for a major pullback” 27 months after the most recent correction ended, then why did the 1990s bull have zero corrections between 4/8/1992 and 7/20/1998? Why did the 2002-2007 bull not have its first correction until nearly four years in? And if heightened volatility means a correction is nigh, why didn’t we see corrections after the -2% or greater daily drops earlier this year or in 2013? Volatility doesn’t predict volatility. Volatility doesn’t predict anything. Volatility is past performance, and past performance doesn’t tell you about anything other than the past.
|By Katy Barnato, CNBC, 09/29/2014|
MarketMinder's View: The “why,” according to the Geneva Report, is that China and the other so-called “fragile eight” countries have an apparently catastrophic combination of slowing growth and high public/private debt loads. They say China, in particular, is in nasty shape because each new dollar of credit generates less and less growth, yet officials keep trying to stimulate through new credit. Thing is, this doesn’t make China automatically the epicenter of the next financial crisis. Or even ripe for a crisis. This piece tempts the reader to draw parallels with past Emerging Markets crises, but developing economies have evolved since then. Much of this credit is denominated in local currencies, not foreign (dollars), and most of these nations (except China) have floating currencies. That should help contain the damage in the event that any of these countries really do experience credit bubbles that go poof.
|By Alexandra Scaggs, The Wall Street Journal, 09/29/2014|
MarketMinder's View: This illustrates why small cap usually underperforms during maturing bull markets: Investors get jittery over what they (rightly or wrongly) see as riskier buys and flock to the perceived quality (and relative earnings stability) of the largest firms. That sentiment shift is evident here. Whether or not small cap keeps falling or creeps back up, it seems highly unlikely to lead for the remainder of this bull market. For more, see our “